Talmer Bancorp (TLMR) 10-Q 2015 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

or

oTRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to            

Commission file number: 001-36308

TALMER BANCORP, INC.

(Exact name of registrant as specified in its charter)

Michigan	61-1511150
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2301 West Big Beaver Rd, Suite 525 Troy, Michigan	48084
(Address of principal executive offices)	(Zip Code)

(248) 498-2802

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

Large accelerated filer o	Accelerated filer o
Non-accelerated filer x  (Do not check if a smaller reporting company)	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o No x

The number of shares outstanding of the issuer’s Class A common stock, as of November 10, 2015 was 66,125,198.

TABLE OF CONTENTS

		Page
Cautionary Note Regarding Forward-Looking Statements		1
PART I — FINANCIAL INFORMATION		2
ITEM 1.	Financial Statements (Unaudited)	2
	Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	3
	Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014	5
	Consolidated Statements of Changes in Shareholders’ Equity for the nine months ended September 30, 2015 and 2014	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014	7
	Notes to Consolidated Statements	9
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	67
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	111
ITEM 4.	Controls and Procedures	112
PART II — OTHER INFORMATION		113
ITEM 1.	Legal Proceedings	113
ITEM 1A.	Risk Factors	113
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	113
ITEM 3.	Defaults Upon Senior Securities	113
ITEM 4.	Mine Safety Disclosures	113
ITEM 5.	Other Information	113
ITEM 6.	Exhibits	113

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Statements included in this report that are not historical in nature are intended to be, and are hereby identified as, forward-looking statements within the meaning of the federal securities laws.  The words “may,” “will,” “anticipate,” “should,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” and “intend,” as well as other similar words and expressions of the future, are intended to identify forward-looking statements.  These forward-looking statements include statements related to our growth opportunities, our expectations related to loan concentrations, our ability to enhance earnings, including through the continued rationalization of our retail banking footprint, anticipated future financial performance, and management’s long-term performance goals, as well as statements relating to the effects on results of operations and financial condition from expected developments or events, including anticipated collections from the FDIC under loss share agreements and future amortization of the related FDIC indemnification asset, or business and growth strategies, including anticipated internal growth and plans to establish or acquire banks or the assets of failed banks.

These forward-looking statements involve significant risks and uncertainties that could cause our actual results to differ materially from those anticipated in such statements.  Potential risks and uncertainties include the following:

• general economic conditions (both generally and in our markets) may be less favorable than expected, which could result in, among other things, a deterioration in credit quality, a reduction in demand for credit and a decline in real estate values;

• the general decline in the real estate and lending markets, particularly in our market areas, may continue to negatively affect our financial results;

• our ability to raise additional capital may be impaired if current levels of market disruption and volatility continue or worsen;

• our inability to be reimbursed by the FDIC for any further losses on non-single family covered assets as our reimbursement rights have begun to expire;

• prior to termination of our loss share agreements, we may be unable to collect reimbursements on losses that we incur on our assets covered under loss share agreements with the FDIC as we anticipate;

• costs or difficulties related to the integration of the banks we acquired or may acquire may be greater than expected;

• restrictions or conditions imposed by our regulators on our operations or the operations of banks we acquire may make it more difficult for us to achieve our goals;

• legislative or regulatory changes, including changes in accounting standards and compliance requirements, may adversely affect us;

• competitive pressures among depository and other financial institutions may increase significantly;

• changes in the interest rate environment may reduce margins or the volumes or values of the loans we make or have acquired;

• other financial institutions have greater financial resources and may be able to develop or acquire products that enable them to compete more successfully than we can;

• our ability to attract and retain key personnel can be affected by the increased competition for experienced employees in the banking industry;

• adverse changes may occur in the bond and equity markets;

• war or terrorist activities may cause further deterioration in the economy or cause instability in credit markets; and

• economic, governmental or other factors may prevent the projected population, residential and commercial growth in the markets in which we operate.

You should not place undue reliance on the forward-looking statements, which speak only as of the date of this report.  All subsequent written and oral forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.  We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.  See Item 1A, Risk Factors, in our Annual Report on Form 10-K for the year ended December 31, 2014, for a description of some of the important factors that may affect actual outcomes.

1

PART I

Item 1.  Financial Statements.

2

Talmer Bancorp, Inc.

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands, except per share data)	September 30, 2015			December 31, 2014
Assets
Cash and due from banks	$	82,822		$	86,185
Interest-bearing deposits with other banks	106,740			96,551
Federal funds sold and other short-term investments	140,000			71,000
Total cash and cash equivalents	329,562			253,736
Securities available-for-sale	880,705			740,819
Federal Home Loan Bank stock	25,416			20,212
Loans held for sale, at fair value	100,255			93,453
Loans:
Residential real estate (includes $20.9 million and $18.3 million respectively, measured at fair value) (1)	1,452,290			1,426,012
Commercial real estate	1,484,421			1,310,938
Commercial and industrial	1,196,717			869,477
Real estate construction (includes $1.2 million measured at fair value at December 31, 2014) (1)	217,035			131,686
Consumer	164,496			164,524
Total loans, excluding covered loans	4,514,959			3,902,637
Less: Allowance for loan losses - uncovered	(45,080		)	(33,819		)
Net loans - excluding covered loans	4,469,879			3,868,818
Covered loans	186,629			346,490
Less: Allowance for loan losses - covered	(10,757		)	(21,353		)
Net loans - covered	175,872			325,137
Net total loans	4,645,751			4,193,955
Premises and equipment	44,133			48,389
FDIC indemnification asset	30,551			67,026
Other real estate owned and repossessed assets	33,553			48,743
Loan servicing rights	55,786			70,598
Core deposit intangible	13,470			13,035
Goodwill	3,524			—
FDIC receivable	2,618			6,062
Company-owned life insurance	105,975			97,782
Income tax benefit	180,719			177,472
Other assets	52,017			40,982
Total assets	$	6,504,035		$	5,872,264
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	1,050,375		$	887,567
Interest-bearing demand deposits	813,609			660,697
Money market and savings deposits	1,314,798			1,170,236
Time deposits	1,611,315			1,188,178
Other brokered funds	335,354			642,185
Total deposits	5,125,451			4,548,863
FDIC clawback liability	27,269			26,905
FDIC warrants payable	4,513			4,633
Short-term borrowings	102,090			135,743
Long-term debt	484,981			353,972
Other liabilities	44,963			40,541
Total liabilities	5,789,267			5,110,657
Shareholders’ equity
Preferred stock - $1.00 par value
Authorized - 20,000,000 shares at 9/30/2015 and 12/31/2014
Issued and outstanding - 0 shares at 9/30/2015 and 12/31/2014	—			—
Common stock:
Class A Voting Common Stock - $1.00 par value
Authorized - 198,000,000 shares at 9/30/2015 and at 12/31/2014
Issued and outstanding - 66,127,598 shares at 9/30/2015 and 70,532,122 shares at 12/31/2014	66,128			70,532
Class B Non-Voting Common Stock - $1.00 par value
Authorized - 2,000,000 shares at 9/30/2015 and 12/31/2014
Issued and outstanding - 0 shares at 9/30/2015 and 12/31/2014	—			—
Additional paid-in-capital	316,160			405,436
Retained earnings	326,678			281,789
Accumulated other comprehensive income, net of tax	5,802			3,850
Total shareholders’ equity	714,768			761,607
Total liabilities and shareholders’ equity	$	6,504,035		$	5,872,264

(1)  Amounts represent loans for which the Company has elected the fair value option.  See Note 3.

See notes to Consolidated Financial Statements.

3

Talmer Bancorp, Inc.

Consolidated Statements of Income

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands, except per share data)	2015			2014			2015			2014
Interest income
Interest and fees on loans	$	60,078		$	58,128		$	178,335		$	168,403
Interest on investments
Taxable	2,731			2,241			7,429			6,246
Tax-exempt	1,873			1,444			5,146			4,622
Total interest on securities	4,604			3,685			12,575			10,868
Interest on interest-earning cash balances	107			159			310			546
Interest on federal funds and other short-term investments	342			130			776			401
Dividends on FHLB stock	285			177			754			690
FDIC indemnification asset	(4,366		)	(6,663		)	(22,164		)	(18,887		)
Total interest income	61,050			55,616			170,586			162,021
Interest Expense
Interest-bearing demand deposits	401			190			1,073			630
Money market and savings deposits	620			487			1,653			1,473
Time deposits	2,582			1,611			6,540			4,534
Other brokered funds	541			288			1,771			352
Interest on short-term borrowings	350			122			638			330
Interest on long-term debt	909			701			2,623			1,902
Total interest expense	5,403			3,399			14,298			9,221
Net interest income	55,647			52,217			156,288			152,800
Provision for loan losses - uncovered	3,666			7,784			8,147			17,427
Benefit for loan losses - covered	(2,966		)	(6,275		)	(12,767		)	(16,094		)
Net interest income after provision for loan losses	54,947			50,708			160,908			151,467
Noninterest income
Deposit fee income	2,494			3,047			7,375			9,533
Mortgage banking and other loan fees	(1,721		)	2,065			1,716			2,028
Net gain on sales of loans	6,815			4,083			24,181			12,808
Net gain on sales of branches	—			14,410			—			14,410
Bargain purchase gain	—			—			—			41,977
FDIC loss sharing income	(2,696		)	(2,420		)	(9,692		)	(5,967		)
Accelerated discount on acquired loans	9,491			3,663			25,133			14,455
Net gain (loss) on sales of securities	202			244			101			(2,066		)
Company-owned life insurance	740			806			2,336			1,886
Other income	4,017			4,076			11,720			12,601
Total noninterest income	19,342			29,974			62,870			101,665
Noninterest expense
Salary and employee benefits	27,665			29,795			85,562			96,112
Occupancy and equipment expense	6,472			7,981			22,553			24,895
Data processing fees	1,356			1,610			5,015			5,610
Professional service fees	3,197			2,964			10,015			9,629
FDIC loss sharing expense	292			245			1,374			1,752
Bank acquisition and due diligence fees	113			239			1,944			3,436
Marketing expense	1,748			1,001			4,326			3,697
Other employee expense	722			621			2,482			2,016
Insurance expense	1,305			1,383			4,362			4,082
Other expense	4,959			5,424			20,084			19,553
Total noninterest expense	47,829			51,263			157,717			170,782
Income before income taxes	26,460			29,419			66,061			82,350
Income tax provision	6,425			9,904			19,045			4,002
Net income	$	20,035		$	19,515		$	47,016		$	78,348
Earnings per common share:
Basic	$	0.29		$	0.28		$	0.67		$	1.13
Diluted	$	0.27		$	0.26		$	0.63		$	1.04
Average common shares outstanding - basic	68,731			70,092			69,744			69,414
Average common shares outstanding - diluted	73,222			75,752			74,447			74,948
Cash dividends declared on common stock	$	711		$	704		$	2,127		$	704
Cash dividends declared per common share	$	0.01		$	0.01		$	0.03		$	0.01

 See notes to Consolidated Financial Statements.

4

Talmer Bancorp, Inc.

Consolidated Statements of Comprehensive Income

(Unaudited)

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Net income	$	20,035		$	19,515		$	47,016		$	78,348
Other comprehensive income:
Unrealized holding gains on securities available-for-sale arising during the period	6,477			20			3,469			13,447
Reclassification adjustment for (gains) losses on realized income	(202		)	(244		)	(101		)	2,066
Tax effect	(2,196		)	78			(1,179		)	(5,430		)
Net unrealized gains (losses) on securities available-for-sale, net of tax	4,079			(146		)	2,189			10,083
Unrealized losses on interest rate swaps designated as cash flow hedges	(893		)	—			(660		)	—
Reclassification adjustment for losses included in net income	104			—			296			—
Tax effect	276			—			127			—
Net unrealized losses on interest rate swaps designated as cash flow hedges, net of tax	(513		)	—			(237		)	—
Other comprehensive income (loss), net of tax	3,566			(146		)	1,952			10,083
Total comprehensive income, net of tax	$	23,601		$	19,369		$	48,968		$	88,431

See notes to Consolidated Financial Statements.

5

Talmer Bancorp, Inc.

Consolidated Statements of Changes in Shareholders’ Equity

(Unaudited)

						Additional						Accumulated Other			Total
	Common Stock					Paid in			Retained			Comprehensive			Shareholders’
(In thousands)	Shares		Amount			Capital			Earnings			Income (Loss)			Equity
Balance at December 31, 2013	66,234		$	66,234		$	366,428		$	192,349		$	(7,996	)	$	617,015
Net income	—		—			—			78,348			—			78,348
Other comprehensive income	—		—			—			—			10,083			10,083
Stock-based compensation expense	—		—			798			—			—			798
Restricted stock awards	378		378			(378		)	—			—			—
Issuance of common shares, including tax benefit	3,892		3,892			37,220			—			—			41,112
Cash dividends paid on common stock (1)	—		—			—			(704		)				(704		)
Balance at September 30, 2014	70,504		$	70,504		$	404,068		$	269,993		$	2,087		$	746,652
Balance at December 31, 2014	70,532		$	70,532		$	405,436		$	281,789		$	3,850		$	761,607
Net income	—		—			—			47,016			—			47,016
Other comprehensive income	—		—			—			—			1,952			1,952
Stock-based compensation expense	—		—			1,381			—			—			1,381
Restricted stock awards, including tax benefit	380		380			(364		)	—			—			16
Issuance of common shares, including tax benefit	293		293			(491		)	—			—			(198		)
Repurchase of warrants to purchase 2.5 million shares, at fair value	—		—			(19,892		)	—			—			(19,892		)
Repurchase of 5.1 million shares	(5,077	)	(5,077		)	(69,910		)	—			—			(74,987		)
Cash dividends paid on common stock (1)	—		—			—			(2,127		)	—			(2,127		)
Balance at September 30, 2015	66,128		$	66,128		$	316,160		$	326,678		$	5,802		$	714,768

 (1) The Company declared common stock dividends of $0.01 in each of the first, second and third quarters of 2015 and in the third quarter of 2014.

See notes to Consolidated Financial Statements.

6

Talmer Bancorp, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

	Nine months ended September 30,
(Dollars in thousands)	2015			2014
Cash flows from operating activities
Net income	$	47,016		$	78,348
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	5,476			4,831
Amortization of core deposit intangibles	1,975			2,140
Stock-based compensation expense	1,381			798
Provision (benefit) for loan losses	(4,620		)	1,333
Originations of loans held for sale	(919,662		)	(760,802		)
Proceeds from sales of loans	932,444			692,572
Net gain from sales of loans	(24,181		)	(12,808		)
Net gain from sale of branches	—			(14,410		)
Net (gain) loss on sales of securities	(101		)	2,066
Gain on acquisition	—			(41,977		)
Valuation allowance and writedowns on other real estate and other repossessed assets	7,283			4,466
Valuation change in Company-owned life insurance	(3,474		)	(1,886		)
Valuation change in loan servicing rights	10,717			11,036
Additions to loan servicing rights	(8,607		)	(6,046		)
Net decrease in FDIC indemnification asset and receivable other than payments received	36,211			37,969
Net gain on sales of other real estate owned and repossessed assets	(5,731		)	(6,652		)
Net increase in accrued interest receivable and other assets	(18,486		)	(15,915		)
Net increase in accrued expenses and other liabilities	418			12,532
Net securities premium amortization	5,570			3,846
Deferred income tax benefit	6,810			19,193
Change in valuation allowance of deferred income tax asset	2,804			(10,127		)
Other, net	1,059			1,188
Net cash from operating activities	74,302			1,695
Cash flows from investing activities
Net increase in uncovered loans	(389,055		)	(561,980		)
Net decrease in covered loans	66,319			105,748
Purchases of loans	(30,793		)	(53,556		)
Purchases of FHLB stock	(6,717		)	(6,300		)
Purchases of securities available-for-sale	(267,175		)	(257,534		)
Purchases of Company-owned life insurance	—			(55,219		)
Purchases of premises and equipment	(3,564		)	(10,502		)
Payments received from FDIC under loss sharing agreements	3,708			6,361
Proceeds from:
Maturities and redemptions of securities available-for-sale	106,160			83,852
Redemption of FHLB Stock	2,387			11,110
Sale of securities available-for-sale	53,050			82,496
Sale of loan servicing rights	12,702			—
Sale of loans	49,839			73,437
Sale of other real estate owned and repossessed assets	39,011			37,249
Sale of premises and equipment	2,625			10,673
Sale of deposits	—			(389,476		)
Net cash provided from acquisition	810			209,831
Net cash used in investing activities	(360,693		)	(713,810		)
Cash flows from financing activities
Net increase in deposits	375,135			430,366
Draw on senior unsecured line of credit	30,000			—
Repayments of senior unsecured line of credit	—			(35,000		)
Net increase in (repayment of) other short-term borrowings	(63,653		)	113,679
Issuances of long-term FHLB advances	300,000			110,000
Repayments of long-term FHLB advances	(177,466		)	(22,902		)
Repayments on long-term sweep repurchase agreements	(1,232		)	(1,226		)
Repayments of subordinated debt	(3,500		)	—
Other changes in long-term debt	121			100
Repurchase of 5.1 million common shares	(74,987		)	—
Repurchase of warrants to purchase 2.5 million shares, at fair value	(19,892		)	—
Issuance of common stock and restricted stock awards, including tax benefit	(182		)	41,112
Cash dividends paid on common stock ($0.03 and $0.01 per share, respectively)	(2,127		)	(704		)

7

Net cash from financing activities	362,217			635,425
Net change in cash and cash equivalents	75,826			(76,690		)
Beginning cash and cash equivalents	253,736			375,356
Ending cash and cash equivalents	$	329,562		$	298,666
Supplemental disclosure of cash flow information:
Interest paid	$	12,772		$	9,450
Income taxes paid	16,745			5,808
Transfer from loans to other real estate owned and repossessed assets	23,512			18,560
Net transfer of loans held for sale (to) from loans held for investment	(3,983		)	21,266
Transfer from premises and equipment to other real estate owned	889			675
Transfer from covered to uncovered loans, in connection with the expiration of the first of our four non-single family FDIC loss share agreements	77,022			—
Non-cash transactions:
Increase in assets and liabilities of acquisitions:
Securities	34,022			13,619
FHLB stock	874			5,933
Uncovered loans	162,265			571,666
Premises and equipment	2,077			6,540
Loan servicing rights	—			767
Company-owned life insurance	4,719			—
Other real estate owned and repossessed assets	1,260			30,878
Core deposit intangible	2,410			3,633
Other assets	6,462			62,542
Deposits	201,453			857,769
Short-term borrowings	—			18
Long-term debt	13,086			—
Other liabilities	3,884			5,645

See notes to Consolidated Financial Statements.

8

TALMER BANCORP, INC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2015

1. BASIS OF PRESENTATION AND RECENTLY ADOPTED AND ISSUED ACCOUNTING STANDARDS

The accompanying unaudited consolidated financial statements of Talmer Bancorp, Inc. (“the Company”), and its wholly-owned subsidiaries have been prepared in accordance with United States (U.S.) generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the Consolidated Financial Statements, primarily consisting of normal recurring adjustments, have been included. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year or for any other interim period. Certain items in prior periods were reclassified to conform to the current presentation.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s consolidated financial statements and footnotes included in the Annual Report of Talmer Bancorp, Inc. on Form 10-K for the year ended December 31, 2014.

On February 6, 2015, the Company acquired First of Huron Corp. which resulted in the recognition of goodwill on the Consolidated Balance Sheets. For further information, refer to Note 2, “Business Combinations”.  Goodwill is initially recorded as the excess of the purchase price over the fair value of identifiable net assets acquired in a business combination.  Goodwill is required to be tested annually for impairment or whenever events occur that may indicate that the recoverability of the carrying amount is not probable.  In the event of impairment, the amount by which the carrying amount exceeds the fair value is charged to earnings.

On February 17, 2015, the Company repurchased an aggregate of 2,529,416 warrants to purchase shares of Class A common stock including 1,623,162 of warrants issued on April 30, 2010, 109,122 of warrants issued on February 21, 2012 and 797,132 of warrants issued on December 27, 2012.  The purchase price was based upon the fair value of the warrants on February 17, 2015, determined utilizing the closing price of our stock on the date of repurchase, and resulted in an aggregate purchase price of $19.9 million.

On August 21, 2015, Talmer West Bank was merged with and into Talmer Bank and Trust.

On August 31, 2015, the Company repurchased 5,077,000 shares of our Class A common stock in an underwritten public offering by which funds affiliated with WL Ross & Co. LLC ("WL Ross Funds") agreed to sell 9,664,579 shares of their Talmer Class A common stock. The WL Ross Funds received all of the net proceeds from the offering. The purchase price in the offering was $14.77 per share, for an aggregate purchase price of $75.0 million. The shares were immediately retired following the purchase.

Recently Adopted and Issued Accounting Standards:  The following provides a description of recently adopted or newly issued not yet effective accounting standards that had or could have a material effect on our financial statements.

In May of 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including revenue recognition guidance.  The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU is intended to clarify and converge the revenue recognition principles under U.S. GAAP and International Financial Reporting Standards and to streamline revenue recognition requirements in addition to expanding required revenue recognition disclosures.  In August of 2015, the FASB issued ASU 2015-14, "Deferral of the Effective Date" ("ASU 2015-14"), which provides a one year deferral to the effective date, therefore, ASU 2014-09 is effective for public companies for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017. As such, the Company will adopt ASU 2014-09 as of January 1, 2018. Under the provision, the Company will have the option to adopt the guidance using either a full retrospective method or a modified transition approach.  The Company is currently evaluating the provisions of ASU 2014-09.

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2.  BUSINESS COMBINATIONS

The Company has determined that the acquisitions of First of Huron Corp. (“FHC”), and its subsidiary bank, Signature Bank, and Talmer West Bank (formerly known as Michigan Commerce Bank) constitute business combinations as defined by FASB ASC Topic 805, “Business Combinations.”  Accordingly, the assets acquired and liabilities assumed were recorded at their fair values on the date of acquisition, as required. Fair values were determined based on the requirements of FASB ASC Topic 820, “Fair Value Measurement.” In many cases the determination of these fair values required management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change.

On February 6, 2015, the Company acquired FHC for aggregate cash consideration of $13.4 million. In connection with the merger, FHC merged with Talmer Bancorp, Inc., with Talmer Bancorp, Inc. as the surviving company in the merger.  Immediately following the merger, Signature Bank, a Michigan state-chartered bank and wholly owned subsidiary of FHC, merged with and into Talmer Bank and Trust, with Talmer Bank and Trust as the surviving bank.  The Company assumed $3.5 million in subordinated notes issued to FHC and $1.4 million of related interest. The subordinated debt was immediately retired and the interest was paid in full in accordance with the provision of the purchase agreement. The Company also received FHC’s common securities issued by trust preferred issuers and assumed $876 thousand of outstanding interest. The outstanding interest on the trust preferred securities was immediately paid off in accordance with the provisions of the purchase agreement. The Company received certain tax assets and all cash and cash equivalents held by FHC. The Company incurred $1 thousand and $1.2 million of acquisition related expenses during the three and nine months ended September 30, 2015, related to the acquisition of FHC, included within “Bank acquisition and due diligence fees” in the Consolidated Statements of Income. All of the branches acquired fit squarely within the Company’s target market areas.

The acquisition resulted in a recorded $4.8 million in net deferred tax assets at acquisition.  Upon acquisition, FHC incurred an ownership change within the meaning of Section 382 of the Internal Revenue Code, but the acquisition did not result in built-in losses within the meaning of Section 382. At February 6, 2015, FHC had an estimated $1.7 million in gross federal net operating loss carry forwards expiring in 2030, 2032 and 2033 and $303 thousand in federal alternative minimum tax credits with an indefinite life.  As a result of the ownership change, the Company’s ability to benefit from the use of FHC’s pre-ownership change net operating loss and tax credit carry forwards will be limited to approximately $366 thousand per year.  No valuation allowance was established against the deferred tax assets associated with FHC’s pre-change net operating losses and tax credit carry forwards based on management’s estimate that none of the amounts will expire unused.

The assets and liabilities associated with the acquisition of FHC were recorded in the Consolidated Balance Sheets at estimated fair value as of the acquisition date. The following allocation is based on the information that was available to make preliminary estimates of the fair value and may change as additional information becomes available and additional analyses are completed. While the Company believes that information provided a reasonable basis for estimating the fair values, it expects that it could obtain additional information and evidence during the measurement period that may result in changes to the estimated fair value amounts. This measurement period ends on the earlier of one year after the acquisition date or the date we receive the information about the facts and circumstances that existed at the acquisition date. Subsequent adjustments are, and if necessary, will be retrospectively reflected in future filings. These refinements include: (1) changes in the estimated fair value of loans acquired; (2) changes in the estimated fair value of certain premises and equipment acquired; (3) changes in deferred tax assets related to fair value estimates and a change in the expected realization of items considered to be built in losses and (4) a change in the goodwill caused by the net effect of these adjustments.

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(Dollars in thousands)
Consideration paid:
Cash	$	13,395
Fair value of identifiable assets acquired:
Cash and cash equivalents	14,205
Investment securities	34,022
Federal Home Loan Bank stock	874
Loans	162,265
Premises and equipment	2,077
Company-owned life insurance	4,719
Other real estate owned and repossessed assets	1,260
Core deposit intangible	2,410
Other assets	6,462
Total identifiable assets acquired	228,294
Fair value of liabilities assumed:
Deposits	201,453
Long-term debt	13,086
Other liabilities	3,884
Total liabilities assumed	218,423
Fair value of net identifiable assets acquired	9,871
Goodwill recognized in the acquisition	$	3,524

The FHC acquisition resulted in recognition of $3.5 million of goodwill which is the excess of the consideration paid over the fair value of net assets acquired, and is the result of expected operational synergies and other factors.

Loans acquired in the FHC acquisition were initially recorded at fair value with no separate allowance for loan losses.  The Company reviewed the loans at acquisition to determine which should be considered purchased credit impaired loans (i.e. loans accounted for under FASB ASC Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”)) defining impaired loans as those that were either not accruing interest or exhibited credit risk factors consistent with nonperforming loans at the acquisition date.

Fair values for purchased loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of the loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates.  Larger purchased loans are individually evaluated while smaller purchased loans are grouped together according to similar characteristics and were treated in the aggregate when applying various valuation techniques.

The Company accounts for purchased credit impaired loans in accordance with the provisions of ASC 310-30.  The cash flows expected to be collected on purchased loans are estimated based upon the expected remaining life of the underlying loans, which includes the effects of estimated prepayments.  Purchased loans are considered credit impaired if there is evidence of credit deterioration at the date of purchase and if it is probable that not all contractually required payments will be collected.  Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows is recognized on the acquired loans accounted for under ASC 310-30.

Purchased loans outside the scope of ASC 310-30 are accounted for under FASB ASC Subtopic 310-20, “Receivables - Nonrefundable Fees and Costs” (ASC 310-20).  Premiums and discounts created when the loans were recorded at their fair values at acquisition are amortized over the remaining terms of the loans as an adjustment to the related loan’s yield.

The core deposit intangible is being amortized on an accelerated basis over the estimated life, currently expected to be 10 years from the date of acquisition.

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Information regarding acquired loans accounted for under ASC 310-30 as well as those excluded from ASC 310-30 accounting at acquisition date is as follows:

(Dollars in thousands)
Accounted for under ASC 310-30:
Contractual cash flows	$	53,807
Contractual cash flows not expected to be collected (nonaccretable difference)	8,084
Expected cash flows	45,723
Interest component of expected cash flows (accretable yield)	5,268
Fair value at acquisition	$	40,455
Excluded from ASC 310-30 accounting:
Unpaid principal balance	$	124,538
Fair value discount	(2,728		)
Fair value at acquisition	121,810
Total fair value at acquisition	$	162,265

FHC’s results of operations have been included in the Company’s financial results since the February 6, 2015 acquisition date. The acquisition was not considered material to the Company’s financial statements; therefore pro forma financial data and related disclosures are not included.

On January 1, 2014, the Company purchased 100% of the capital stock of Financial Commerce Corporation’s wholly-owned subsidiary banks, Michigan Commerce Bank, a Michigan state-chartered bank, Indiana Community Bank, an Indiana state-chartered bank, Bank of Las Vegas, a Nevada state-chartered bank and Sunrise Bank of Albuquerque, a New Mexico state-chartered bank, and certain other bank-related assets from Financial Commerce Corporation and its parent holding company, Capitol Bancorp Ltd., in a transaction facilitated under Section 363 of the U.S. Bankruptcy Code, for cash consideration of $4.0 million and a separate $2.5 million payment to fund an escrow account to pay the post-petition administrative fees and expenses of the professionals in the bankruptcy cases of Financial Commerce Corporation and Capital Bancorp, Ltd., each of which filed voluntary bankruptcy petitions under Chapter 11 of the U.S. Bankruptcy Code on August 9, 2012, with any unused escrowed funds to be refunded to the Company.

Immediately prior to consummation of the acquisition, Capitol Bancorp Ltd. merged Indiana Community Bank, Bank of Las Vegas and Sunrise Bank of Albuquerque with and into Michigan Commerce Bank, with Michigan Commerce Bank as the surviving bank in the merger.  Simultaneously with the merger, Michigan Commerce Bank changed its name to Talmer West Bank.  Following the acquisition, the Company contributed $99.5 million of additional capital to Talmer West Bank in order to recapitalize the bank.  In order to support the acquisition and recapitalization of Talmer West Bank, the Company borrowed $35.0 million under a senior unsecured line of credit. The Company used a portion of the net proceeds from the initial public offering that closed on February 14, 2014 to repay the $35.0 million during the first quarter of 2014.  Talmer West Bank was consolidated with and into Talmer Bank and Trust on August 21, 2015. The Company incurred $35 thousand and $673 thousand of acquisition and integration expenses related to Talmer West Bank during the three and nine months ended September 30, 2015, respectively. For the three months ended September 30, 2014, the Company did not incur any acquisition and integration expenses related to Talmer West Bank while $1.8 million of expenses were incurred during the nine months ended September 30, 2014. These expenses are included within “Bank acquisition and due diligence fees” in the Consolidated Statements of Income.  Twelve of the branches acquired, or 70% of the total number of branches acquired in the acquisition, fit squarely within the Company’s target market areas.

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The assets and liabilities associated with the acquisition of Talmer West Bank were recorded in the Consolidated Balance Sheets at estimated fair value as of the acquisition date as presented in the following table.

(Dollars in thousands)
Consideration paid:
Cash	$	6,500
Fair value of identifiable assets acquired:
Cash and cash equivalents	216,331
Investment securities	13,619
Federal Home Loan Bank stock	5,933
Loans	571,666
Premises and equipment	6,540
Loan servicing rights	767
Other real estate owned	30,878
Core deposit intangible	3,633
Other assets	62,542
Total identifiable assets acquired	911,909
Fair value of liabilities assumed:
Deposits	857,769
Other liabilities	5,663
Total liabilities assumed	863,432
Fair value of net identifiable assets acquired	48,477
Bargain purchase gain resulting from acquisition	$	41,977

The Talmer West Bank acquisition resulted in a pre-tax bargain purchase gain of $42.0 million as the estimated fair value of assets acquired exceeded the estimated fair value of liabilities assumed and consideration paid.  The gain was included within “Bargain purchase gain” in the Consolidated Statements of Income.

Loans acquired in the Talmer West Bank acquisition were initially recorded at fair value with no separate allowance for loan losses.  Information regarding acquired loans accounted for under ASC 310-30 as well as those excluded from ASC 310-30 accounting at acquisition date is as follows:

(Dollars in thousands)
Accounted for under ASC 310-30:
Contractual cash flows	$	331,523
Contractual cash flows not expected to be collected (nonaccretable difference)	86,410
Expected cash flows	245,113
Interest component of expected cash flows (accretable yield)	32,764
Fair value at acquisition	$	212,349
Excluded from ASC 310-30 accounting:
Unpaid principal balance	$	362,782
Fair value discount	(3,465		)
Fair value at acquisition	359,317
Total fair value at acquisition	$	571,666

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Talmer West Bank’s results of operations have been included in the Company’s financial results since the January 1, 2014 acquisition date.

3.  FAIR VALUE

The fair value framework as detailed by FASB ASC Topic 820, “Fair Value Measurement” requires the categorization of assets and liabilities recorded at fair value into a three-level hierarchy based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. A brief description of each level follows.

Level 1 — Valuation is based upon quoted prices (unadjusted) for identical instruments in active markets.

Level 2 — Valuation is based upon quoted prices for identical or similar instruments in markets that are not active; quoted prices for similar instruments in active markets; or model-based valuation techniques for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3 — Valuation is measured through utilization of model-based techniques that rely on at least one significant assumption not observable in the market. Any necessary unobservable assumptions used reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques.

Fair value estimates are based on existing financial instruments and, in accordance with U.S. GAAP, do not attempt to estimate the value of anticipated future business or the value of assets and liabilities that are not considered financial instruments. In addition, tax ramifications related to the recognition of unrealized gains and losses, such as those within the investment securities portfolio, can have a significant effect on estimated fair values and, in accordance with U.S. GAAP, have not been considered in the estimates. For these reasons, the aggregate fair value should not be considered an indication of the value of the Company.

Following is a description of the valuation methodologies and key inputs used to measure assets and liabilities recorded at fair value, as well as a description of the methods and any significant assumptions used to estimate fair value disclosures for financial assets and liabilities not recorded at fair value in their entirety on a recurring basis. For assets and liabilities recorded at fair value, the description includes the level of the fair value hierarchy in which the assets or liabilities are classified. Transfers of asset or liabilities between levels of the fair value hierarchy are recognized at the beginning of the reporting period, when applicable.

Cash and cash equivalents: Due to the short-term nature, the carrying amount of these assets approximates the estimated fair value.  The Company classifies cash and due from banks as Level 1 and interest-bearing deposits with other banks and federal funds and other short-term investments as Level 2.

Investment securities:  Investment securities classified as available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available or the market is deemed to be inactive at the measurement date, fair values are measured utilizing independent valuation techniques of identical or similar investment securities. Third-party vendors compile prices from various sources and may apply such techniques as matrix pricing to determine the value of identical or similar investment securities. Management reviews the methodologies and assumptions used by the third-party pricing services and evaluates the values provided, principally by comparison with other available market quotes for similar instruments and/or analysis based on internal models using available third-party market data.  Level 2 securities include obligations issued by U.S. government-sponsored enterprises, state and municipal obligations, mortgage-backed securities issued by both U.S. government-sponsored enterprises and non-agency enterprises, corporate debt securities, Small Business Administration Pools and privately issued commercial mortgage-backed securities that have active markets at the measurement date. The fair value of Level 2 securities was determined using quoted prices of securities with similar characteristics or pricing models based on observable market data inputs, primarily interest rates, spreads and prepayment information.

Securities classified as Level 3, including a trust preferred security (included within “Corporate debt securities”) and an obligation of a political subdivision as of September 30, 2015, represent securities in less liquid markets requiring significant management assumptions when determining fair value. As of December 31, 2014, securities classified as Level 3 also included a privately issued subordinated corporate debt security (included within “Corporate debt securities”).  The fair values of these investment securities represent less than one percent of the total available-for-sale securities.  The fair value of the trust preferred security is compiled by a third-party vendor through consideration of recent trades and/or auctions of

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comparable securities, where applicable and are presented without adjustment.  Comparable securities consider credit, structure, tenor, trade flows and cash flow characteristics.  Due to the limited sales of these types of securities, significant unobservable assumptions are included to determine comparable securities to be included in the analysis.  The fair value of the political subdivision obligation has been determined to be equal to the carrying cost since the securities were acquired.  The issuers have continued to pay their obligations without fail and the Company has not received any information to question future payments.   Since the purchase of these securities, no credit related concerns have come to the Company’s attention, therefore no adjustment for credit loss assumptions were made.

Investment securities classified as held-to-maturity are carried at amortized cost.  Due to limited liquidity of these securities, held-to-maturity securities are classified as Level 3.  The fair value of the held-to-maturity security is determined to be equal to the carrying value.  No credit related concerns have come to the Company’s attention; therefore, no credit loss assumptions were made.

Federal Home Loan Bank (“FHLB”) Stock: Restricted equity securities are not readily marketable and are recorded at cost and evaluated for impairment based on the ultimate recoverability of initial cost. No significant observable market data is available for these instruments. The Company considers the profitability and asset quality of the issuer, dividend payment history and recent redemption experience, when determining the ultimate recoverability of cost.  The Company believes its investments in FHLB stock are ultimately recoverable at cost.

Loans held for sale:  Loans held for sale are carried at fair value based on the Company’s election of the fair value option. These loans currently consist of one-to-four family residential real estate loans originated for sale to qualified third parties. The fair value is determined based on quoted market rates and other market conditions considered relevant. The Company classifies loans held for sale as recurring Level 2.

Loans measured at fair value:  During the normal course of business, loans originated with the initial intention to sell but not ultimately sold, are transferred from held for sale to our portfolio of loans held for investment at fair value as the Company adopted the fair value option at origination.  The fair value of these loans is estimated using discounted cash flows, taking into consideration current market interest rates, loan repricing characteristics and expected loan prepayment speeds, while also taking into consideration other significant unobservable inputs such as the payment history and credit quality characteristic of each individual loan and an illiquidity discount reflecting the relative illiquidity of the market. Due to the adjustments made relating to unobservable inputs, the Company classifies the loans transferred from loans held for sale as recurring Level 3. Methods used to estimate loan fair values do not necessarily represent exit price.

Loans:  The Company does not record loans at fair value on a recurring basis other than those discussed in “Loans measured at fair value” above. However, periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements. Loans, outside the scope of ASC 310-30, are considered impaired when, based on current information and events; it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. Impaired loans, which include all nonaccrual loans and troubled debt restructurings, are disclosed as nonrecurring fair value measurements when an allowance is established based on the fair value of the underlying collateral.  Appraisals for collateral-dependent impaired loans are prepared by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties). These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. The comparable sales approach evaluates the sales price of similar properties in the same market area.  This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return.  This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments are routinely made in the appraisal process by the appraisers to account for differences between the comparable sales and income data available. These adjustments generally range from 0% to 40% depending on the property type, as well as various sales and property characteristics including but not limited to: date of sale, size and condition of facility, quality of construction and proximity to the subject property. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics to determine if additional downward adjustments should be made.  Property values are typically adjusted when management is aware of circumstances, economic changes or other conditions, since the date of the appraisal that would impact the expected selling price. Such adjustments are usually significant and result in a nonrecurring Level 3 classification.

Estimated fair values for loans accounted for under ASC 310-30 are based on a discounted cash flow methodology that considers factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Cash flows expected to be collected on these loans are estimated based upon the expected remaining

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life of the underlying loans, which includes the effects of estimated prepayments. The Company classifies the estimated fair value of loans accounted for under ASC 310-30 as Level 3.

For loans excluded from ASC 310-30 accounting that are not individually evaluated for impairment, fair value is estimated using a discounted cash flow model. The cash flows take into consideration current portfolio interest rates and repricing characteristics as well as assumptions relating to prepayment speeds. The discount rates take into consideration the current market interest rate environment, a credit risk component based on the credit characteristics of each loan portfolio, and a liquidity premium reflecting the liquidity or illiquidity of the market. The Company classifies the estimated fair value of non-collateral dependent loans excluded from ASC 310-30 accounting as Level 3.

Premises and equipment:  Premises and equipment are reviewed for impairment when events indicate their carrying amount may not be recoverable from future undiscounted cash flows.  Impaired premises and equipment at both September 30, 2015 and December 31, 2014 were recorded at fair value based on a recent appraisal through a valuation allowance.  The Company classifies impaired premises and equipment as nonrecurring Level 3.

FDIC indemnification asset: The fair value of the FDIC indemnification asset is estimated using projected cash flows related to the loss sharing agreements based on the expected reimbursements for losses and the applicable loss sharing percentages. The Company re-estimates the expected indemnification asset cash flows in conjunction with the quarterly re-estimation of cash flows on covered loans accounted for under ASC 310-30. The expected cash flows are discounted to reflect the uncertainty of the timing and receipt of the loss sharing reimbursement from the FDIC.  These cash flow evaluations are inherently subjective as they require material estimates, all of which may be subject to significant change.  The estimates used in calculating the value of the FDIC indemnification asset are reflective of the estimates utilized to determine the estimated fair value of loans accounted for under ASC 310-30. The Company classifies the estimated fair value of the FDIC indemnification asset as Level 3.

Other real estate owned and repossessed assets: Other real estate owned and repossessed assets represents property acquired by the Company as part of an acquisition, through the loan foreclosure or repossession process, or any other resolution activity that results in partial or total satisfaction of problem loans, or by closing of branches or operating facilities. Properties are initially recorded at fair value, less estimated costs to sell, establishing a new cost basis. Subsequently, the assets are valued at the lower of cost or fair value, less estimated costs to sell, based on periodic valuations performed. Fair value is based upon independent market prices, appraised value or management’s estimate of the value, using a single valuation approach or a combination of approaches including comparable sales, the income approach and existing offers. The comparable sales approach evaluates the sales price of similar properties in the same market area.  This approach is inherently subjective due to the wide range of comparable sale dates. The income approach considers net operating income generated by the property and the investor’s required return.  This approach utilizes various inputs including lease rates and cap rates which are subject to judgment. Adjustments are routinely made in the appraisal process by the appraisers to account for differences between the comparable sales and income data available. These adjustments generally range from 0% to 40% depending on the property type, as well as various sales and property characteristics including but not limited to: date of sale, size and condition of facility, quality of construction and proximity to the subject property.  Adjustments are typically significant and result in a Level 3 classification.

Loan servicing rights: Loan servicing rights are accounted for under the fair value measurement method based on accounting election.  A third party valuation model is used to determine the fair value at the end of each reporting period utilizing a discounted cash flow analysis using interest rates and prepayment speed assumptions currently quoted for comparable instruments and a discount rate determined by management.  Changes in fair value of loan servicing rights are recorded in “Mortgage banking and other loan fees”.  Because of the nature of the valuation inputs, the company classifies loan servicing rights as Level 3.  Refer to Note 10, “Loan Servicing Rights”, for assumptions included in the valuation of loan servicing rights.

FDIC receivable: The FDIC receivable represents claims submitted to the Federal Deposit Insurance Corporation (“FDIC”) for reimbursement for which the Company expects to receive payment within 90 days. Due to their short term nature, the carrying amount of these instruments approximates the estimated fair value. The Company classifies the estimated fair value of FDIC receivable as Level 2.

Company-owned life insurance and deferred compensation plan liabilities: The Company holds life insurance policies on certain officers, both for investment purposes and for the Company’s deferred compensation plan. The carrying value of these policies approximates fair value as it is based on the cash surrender value adjusted for other charges or amounts due that are probable at settlement. As such, the Company classifies the estimated fair value of Company-owned life insurance as Level 2.  Deferred compensation plan liabilities represent the fair value of the obligation to the employee, which corresponds to the

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fair value of the invested assets.  Deferred compensation plan liabilities are recorded with “other liabilities” and are classified by the Company as Level 2.

Derivative instruments: The Company enters into interest rate lock commitments with prospective borrowers to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors, which are carried at fair value on a recurring basis. The fair value of these commitments is based on the fair value of related mortgage loans determined using observable market data.  Interest rate lock commitments are adjusted for expectations of exercise and funding.  This adjustment is not considered to be a material input.  The Company classifies interest rate lock commitments and forward contracts related to mortgage loans to be delivered for sale as recurring Level 2.

Derivative instruments held or issued for risk management or customer-initiated activities are traded in over-the counter markets where quoted market prices are not readily available.  Fair value for over-the-counter derivative instruments is measured on a recurring basis using third party models that use primarily market observable inputs, such as yield curves and option volatilities.  The fair value for these derivatives may include a credit valuation adjustment that is determined by applying a credit spread for the counterparty or the Company, as appropriate, to the total expected exposure of the derivative after considering collateral and other master netting arrangements.  These adjustments, which are considered Level 3 inputs, are based on estimates of current credit spreads to evaluate the likelihood of default.  The Company assesses the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and at both September 30, 2015 and December 31, 2014 it was determined that the credit valuation adjustments were not significant to the overall valuation of its derivatives.  As a result, the company classifies its risk management interest rate swaps designated as cash flow hedges and customer-initiated derivatives valuations in Level 2 of the fair value hierarchy.

Accrued interest receivable and payable: Due to their short term nature, the carrying amount of these instruments approximates the estimated fair value; therefore, the Company classifies the estimated fair value of accrued interest receivable and payable as Level 2.

Deposits: The estimated fair value of demand deposits (e.g., noninterest and interest-bearing demand, savings, other brokered funds and certain types of money market accounts) is, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are based on the discounted value of contractual cash flows at current interest rates. The estimated fair value of deposits does not take into account the value of the Company’s long-term relationships with depositors, commonly known as core deposit intangibles, which are not considered financial instruments.  The Company classifies the estimated fair value of deposits as Level 2.

Clawback liability: The CF Bancorp, First Banking Center and Peoples State Bank loss sharing agreements contain a provision where if losses do not exceed a calculated threshold, the Company is obligated to compensate the FDIC.  The carrying amount of these instruments approximates the estimated fair value.  The estimated fair value requires management’s assumption of what estimated losses will be, which is a significant component.  As such, the Company classifies the estimated fair value of the FDIC clawback liability as Level 3.

Short-term borrowings: Short-term borrowings represent federal funds purchased, a senior unsecured line of credit and certain short-term FHLB advances. Due to their short term nature, the carrying amount of these instruments approximates the estimated fair value. The Company classifies the estimated fair value of short-term borrowings as Level 2.

Long-term debt: Long-term debt includes securities sold under agreements to repurchase, FHLB advances and subordinated notes related to trust preferred securities.  The estimated fair value is based on current rates for similar financing or market quotes to settle those liabilities.  The Company classifies the estimated fair value of long-term debt as Level 2.

FDIC warrants payable: FDIC warrants payable represent stock warrants that were issued to the FDIC in connection with the 2010 FDIC-assisted acquisition of CF Bancorp. These warrants are recorded at net present value based on management estimates used in a discounted pricing model. The inputs into the pricing model include management’s assumption of an annualized growth rate.  The carrying amount of these instruments approximates the estimated fair value.  The Company classifies the estimated fair value of FDIC warrants payable as Level 3.

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The following tables present the recorded amount of assets and liabilities measured at fair value, including financial assets and liabilities for which the Company has elected the fair value option, on a recurring basis:

(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2015
Securities available-for-sale:
U.S. government sponsored agency obligations	$	99,100	$	—	$	99,100	$	—
Obligations of state and political subdivisions:
Taxable	318		—		—		318
Tax-exempt	277,731		—		277,731		—
Small Business Administration (“SBA”) Pools	30,413		—		30,413		—
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	307,355		—		307,355		—
Privately issued	58,197		—		58,197		—
Privately issued commercial mortgage-backed securities	19,142		—		19,142		—
Corporate debt securities	88,449		—		88,019		430
Total securities available-for-sale	880,705		—		879,957		748
Loans measured at fair value:
Residential real estate	20,897		—		—		20,897
Loans held for sale	100,255		—		100,255		—
Loan servicing rights	55,786		—		—		55,786
Derivative assets:
Interest rate lock commitments	2,740		—		2,740		—
Customer-initiated derivatives	5,650		—		5,650		—
Total derivatives	8,390		—		8,390		—
Total assets at fair value	$	1,066,033	$	—	$	988,602	$	77,431
Derivative liabilities:
Forward contracts related to mortgage loans to be delivered for sale	1,082		—		1,082		—
Customer-initiated derivatives	5,684		—		5,684		—
Risk management derivatives	586		—		586		—
Total derivatives	7,352		—		7,352		—
Total liabilities at fair value	$	7,352	$	—	$	7,352	$	—
December 31, 2014
Securities available-for-sale:
U.S. government sponsored agency obligations	$	98,358	$	—	$	98,358	$	—
Obligations of state and political subdivisions:
Taxable	397		—		—		397
Tax-exempt	232,259		—		232,259		—
SBA Pools	33,933		—		33,933		—
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	291,759		—		291,759		—
Privately issued	18,800		—		18,800		—
Privately issued commercial mortgage-backed securities	5,130		—		5,130		—
Corporate debt securities	60,183		—		56,758		3,425
Total securities available-for-sale	740,819		—		736,997		3,822
Loans measured at fair value:
Residential real estate	18,311		—		—		18,311
Real estate construction	1,215		—		—		1,215
Loans held for sale	93,453		—		93,453		—
Loan servicing rights	70,598		—		—		70,598
Derivative assets:
Interest rate lock commitments	1,489		—		1,489		—
Customer-initiated derivatives	1,588		—		1,588		—
Total derivatives	3,077		—		3,077		—
Total assets at fair value	$	927,473	$	—	$	833,527	$	93,946
Derivative liabilities:

18

Forward contracts related to mortgage loans to be delivered for sale	803		—		803		—
Customer-initiated derivatives	1,477		—		1,477		—
Risk management derivatives	222		—		222		—
Total derivatives	2,502		—		2,502		—
Total liabilities at fair value	$	2,502	$	—	$	2,502	$	—

During the nine months ended September 30, 2015, a privately issued subordinated debt security (included within “Corporate debt securities”) was transferred from Level 3 in the fair value hierarchy to Level 2 due to the market for this security becoming active during the period.  There were no transfers between levels within the fair value hierarchy during the three months ended September 30, 2015 or the three and nine months ended September 30, 2014.

The following table summarizes the changes in Level 3 assets and liabilities measured at fair value on a recurring basis.

	Three months ended September 30, 2015
	Securities available-for-sale
(Dollars in thousands)	Taxable obligations of state and political subdivisions		Corporate debt securities			Loans held for investment			Loan servicing rights
Balance, beginning of period	$	318	$	448		$	20,907		$	58,894
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	—		1			—			—
Recorded in “Mortgage banking and other loan fees”	—		—			236			(5,867		)
Recorded in OCI (pre-tax)	—		(19		)	—			—
New originations	—		—			—			2,759
Repayments	—		—			(246		)	—
Balance, end of period	$	318	$	430		$	20,897		$	55,786

	Nine months ended September 30, 2015
	Securities available-for-sale
(Dollars in thousands)	Taxable obligations of state and political subdivisions			Corporate debt securities			Loans held for investment			Loan servicing rights
Balance, beginning of period	$	397		$	3,425		$	19,526		$	70,598
Transfer between levels within fair value hierarchy	—			(3,000		)	—			—
Transfers from loans held for sale	—			—			3,983			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	1			3			—			—
Recorded in “Net gain on sales of loans”	—			—			139			—
Recorded in “Mortgage banking and other loan fees”	—			—			(3		)	(10,717		)
Recorded in OCI (pre-tax)	—			2			—			—
New originations	—			—			—			8,607
Reduction from servicing rights sold	—			—			—			(12,702		)
Repayments	(80		)	—			(2,748		)	—
Balance, end of period	$	318		$	430		$	20,897		$	55,786

19

	Three months ended September 30, 2014
	Securities available-for-sale
(Dollars in thousands)	Taxable obligations of state and political subdivisions		Corporate debt securities		Loans held for investment			Loan servicing rights
Balance, beginning of period	$	397	$	433	$	18,521		$	74,104
Transfers from loans held for sale	—		—		280			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	—		1		—			—
Recorded in “Mortgage banking and other loan fees”	—		—		(93		)	(2,022		)
Recorded in OCI (pre-tax)	—		1		—			—
New originations	—		—		—			2,298
Repayments	—		—		(827		)	—
Balance, end of period	$	397	$	435	$	17,881		$	74,380

	Nine months ended September 30, 2014
	Securities available-for-sale
(Dollars in thousands)	Taxable obligations of state and political subdivisions		Corporate debt securities		Loans held for investment			Loan servicing rights
Balance, beginning of period	$	396	$	405	$	17,708		$	78,603
Additions due to acquisition	—		—		—			767
Transfers from loans held for sale	—		—		1,058			—
Gains (losses):
Recorded in earnings (realized):
Recorded in “Interest on investments”	1		3		—			—
Recorded in “Net gain on sales of loans”	—		—		8			—
Recorded in “Mortgage banking and other loan fees”	—		—		374			(11,036		)
Recorded in OCI (pre-tax)	—		27		—			—
New originations	—		—		—			6,046
Repayments	—		—		(1,395		)	—
Draws on previously issued lines of credits	—		—		128			—
Balance, end of period	$	397	$	435	$	17,881		$	74,380

The aggregate fair value, contractual balance (including accrued interest), and gain or loss position for loans held for investment measured and recorded at fair value was as follows:

(Dollars in thousands)	September 30, 2015		December 31, 2014
Aggregate fair value	$	20,897	$	19,526
Contractual balance	20,335		19,100
Fair market value gain	562		426

There were no gains (losses) included in the fair value above that were associated with instrument specific credit risk. The aggregate fair value and contractual principal balance of loans held for investment measured and recorded at fair value that were 90 days or more past due as of September 30, 2015 was $140 thousand and $238 thousand, respectively. Of the aggregate fair value of loans that were 90 days or more past due as of September 30, 2015, $140 thousand were on nonaccrual status. The aggregate fair value and contractual principal balance of loans held for investment measured and recorded at fair value that

20

were 90 days or more past due as of December 31, 2014 was $155 thousand and $191 thousand, respectively.  Of the aggregate fair value of loans that were 90 days or more past due as of December 31, 2014, $155 thousand were on nonaccrual status.

Interest income is recorded based on the contractual terms of the loans in accordance with the Company’s policy on loans held for investment and is recorded in “Interest and fees on loans” in the Consolidated Statements of Income. For the three months ended September 30, 2015 and 2014, there were $197 thousand and $164 thousand, respectively, and $610 thousand and $423 thousand for the nine months ended September 30, 2015 and 2014, respectively, of interest income earned on loans transferred from loans held for sale to loans held for investment.

The total amount of gains (losses) from changes in fair value of loans held for investment measured at fair value in the Consolidated Statements of Income were as follows:

	For the three months ended September 30,					For the nine months ended September 30,
(Dollars in thousands)	2015		2014			2015			2014
Change in fair value:
Included in “Net gain on sales of loans”	$	—	$	—		$	139		$	8
Included in “Mortgage banking and other loan fees”	236		(93		)	(3		)	374

The Company has elected the fair value option for loans held for sale.  These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loans in accordance with the Company policy on loans held for investment in “Interest and fees on loans” in the Consolidated Statements of Income. None of these loans are 90 days past due or on nonaccrual status as of September 30, 2015 or December 31, 2014.

The aggregate fair value, contractual balance (including accrued interest), and gain or loss for loans held for sale carried at fair value was as follows:

(Dollars in thousands)	September 30, 2015		December 31, 2014
Aggregate fair value	$	100,255	$	93,453
Contractual balance	96,781		89,138
Unrealized gain	3,474		4,315

The total amount of gains (losses) from changes in fair value of loans held for sale included in “Net gain on sales of loans” in the Consolidated Statements of Income were as follows:

	For the three months ended September 30,					For the nine months ended September 30,
(Dollars in thousands)	2015		2014			2015			2014
Change in fair value	$	283	$	(1,935	)	$	(841	)	$	2,899

Certain financial assets and liabilities are measured at fair value on a nonrecurring basis. These include assets that are recorded at the lower of cost or fair value that were recognized at fair value below cost at the end of the period.

21

The following table presents the recorded amount of assets and liabilities measured at fair value on a non-recurring basis:

(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2015
Impaired loans:(1)
Uncovered
Residential real estate	$	2,569	$	—	$	—	$	2,569
Commercial real estate	463		—		—		463
Commercial and industrial	2,639		—		—		2,639
Total uncovered impaired loans	5,671		—		—		5,671
Covered
Residential real estate	212		—		—		212
Commercial real estate	125		—		—		125
Total covered impaired loans	337		—		—		337
Total impaired loans	6,008		—		—		6,008
Other real estate owned (uncovered)(2)	3,235		—		—		3,235
Other real estate owned (covered)(3)	1,082		—		—		1,082
Repossessed assets(4)	5,514		—		—		5,514
Premises and equipment(5)	1,575		—		—		1,575
Total	$	17,414	$	—	$	—	$	17,414
December 31, 2014
Impaired loans:(1)
Uncovered
Residential real estate	$	2,898	$	—	$	—	$	2,898
Commercial real estate	4,115		—		—		4,115
Commercial and industrial	579		—		—		579
Consumer	12		—		—		12
Total uncovered impaired loans	7,604		—		—		7,604
Covered
Residential real estate	152		—		—		152
Commercial and industrial	350		—		—		350
Total covered impaired loans	502		—		—		502
Total impaired loans	8,106		—		—		8,106
Other real estate owned (uncovered)(2)	9,670		—		—		9,670
Other real estate owned (covered)(3)	3,807		—		—		3,807
Repossessed assets(4)	9,654		—		—		9,654
Premises and equipment(5)	675		—		—		675
Total	$	31,912	$	—	$	—	$	31,912

(1) Specific reserves of $2.0 million and $2.9 million were provided to reduce the fair value of these loans at September 30, 2015 and December 31, 2014, respectively, based on the estimated fair value of the underlying collateral. In addition, charge-offs of $81 thousand and $633 thousand reduced the fair value of these loans for the three months ended September 30, 2015 and 2014, respectively, and $91 thousand and $1.3 million for the nine months ended September 30, 2015 and 2014, respectively.

22

(2) The Company charged $526 thousand and $1.4 million through other noninterest expense during the three months ended September 30, 2015 and 2014, respectively, and $1.8 million and $2.9 million during the nine months ended September 30, 2015 and 2014, respectively, to reduce the fair value of these properties.

(3) The Company charged $154 thousand and $701 thousand through other noninterest expense during the three months ended September 30, 2015 and 2014, respectively, and $790 thousand and $1.6 million during the nine months ended September 30, 2015 and 2014, respectively, to reduce the fair value of these properties.  These expenses were partially offset by FDIC loss sharing income recorded due to the associated loss share coverage.

(4) The Company charged $318 thousand and $786 thousand through other noninterest expense during the three and nine months ended September 30, 2015, respectively, to reduce the fair value of these assets.  As of September 30, 2014, there were no repossessed assets deemed impaired and there were no charges taken relating to these assets during the three and nine months ended September 30, 2014. A valuation allowance of $4.3 million and $460 thousand was provided to reduce the fair value of these repossessed assets at September 30, 2015 and December 31, 2014, respectively, based on the estimated fair value as of each respective date.

(5) The Company charged $1.1 million through other noninterest expenses during the nine months ended September 30, 2015 and $185 thousand during both the three and nine months ended September 30, 2014 to reduce the value of premises and equipment deemed impaired during the period. There were no impairment charges on premises and equipment during the three months ended September 30, 2015.

The Company typically holds the majority of its financial instruments until maturity and thus does not expect to realize many of the estimated fair value amounts disclosed.  The disclosures also do not include estimated fair value amounts for items that are not defined as financial instruments, but which have significant value.  These include such items as core deposit intangibles, the future earnings potential of significant customer relationships and the value of fee generating businesses.  The Company believes the imprecision of an estimate could be significant.

The following tables present the carrying amount and estimated fair values of financial instruments not recorded at fair value in their entirety on a recurring basis on the Company’s Consolidated Balance Sheets.

			Estimated Fair Value
(Dollars in thousands)	Carrying Value		Total		Level 1		Level 2		Level 3
September 30, 2015
Financial assets:
Cash and cash equivalents	$	329,562	$	329,562	$	82,822	$	246,740	$	—
Federal Home Loan Bank stock	25,416		N/A
Net loans, excluding covered loans(1)	4,469,879		4,572,634		—		—		4,572,634
Net covered loans(2)	175,872		222,614		—		—		222,614
Accrued interest receivable	16,096		16,096		—		16,096		—
FDIC indemnification asset	30,551		15,759		—		—		15,759
FDIC receivable	2,618		2,618		—		2,618		—
Company-owned life insurance	105,975		105,975		—		105,975		—
Securities held-to-maturity	1,678		1,678		—		—		1,678
Financial liabilities:
Deposits:
Savings and demand deposits	$	3,447,364	$	3,447,364	$	—	$	3,447,364	$	—
Time deposits(3)	1,678,087		1,678,060		—		1,678,060		—
Total deposits	5,125,451		5,125,424		—		5,125,424		—
FDIC clawback liability	27,269		27,269		—		—		27,269
Short-term borrowings	102,090		102,090		—		102,090		—
Long-term debt	484,981		479,658		—		479,658		—
FDIC warrants payable	4,513		4,513		—		—		4,513
Accrued interest payable	3,002		3,002		—		3,002		—
Deferred compensation plan liabilities	1,654		1,654		—		1,654		—

23

(1) Included $5.7 million of impaired loans recorded at fair value on a nonrecurring basis and $20.9 million of loans recorded at fair value on a recurring basis.

(2) Included $337 thousand of impaired loans recorded at fair value on a nonrecurring basis.

(3) Includes $66.8 million of other brokered funds.

			Estimated Fair Value
(Dollars in thousands)	Carrying Value		Total		Level 1		Level 2		Level 3
December 31, 2014
Financial assets:
Cash and cash equivalents	$	253,736	$	253,736	$	86,185	$	167,551	$	—
Federal Home Loan Bank stock	20,212		N/A
Net loans, excluding covered loans(1)	3,868,818		3,948,847		—		—		3,948,847
Net covered loans(2)	325,137		420,627		—		—		420,627
Accrued interest receivable	12,533		12,533		—		12,533		—
FDIC indemnification asset	67,026		34,572		—		—		34,572
FDIC receivable	6,062		6,062		—		6,062		—
Company-owned life insurance	97,782		97,782		—		97,782		—
Securities held-to-maturity	1,226		1,226		—		—		1,226
Financial liabilities:
Deposits:
Savings and demand deposits	$	3,288,414	$	3,288,414	$	—	$	3,288,414	$	—
Time deposits(3)	1,260,449		1,260,453		—		1,260,453		—
Total deposits	4,548,863		4,548,867		—		4,548,867		—
FDIC clawback liability	26,905		26,905		—		—		26,905
Short-term borrowings	135,743		135,743		—		135,743		—
Long-term debt	353,972		348,373		—		348,373		—
FDIC warrants payable	4,633		4,633		—		—		4,633
Accrued interest payable	1,476		1,476		—		1,476		—
Deferred compensation plan liabilities	587		587		—		587		—

(1) Included $7.6 million of impaired loans recorded at fair value on a nonrecurring basis and $19.5 million of loans recorded at fair value on a recurring basis.

(2) Included $502 thousand of impaired loans recorded at fair value on a nonrecurring basis.

(3) Includes $72.3 million of other brokered funds.

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4.  SECURITIES

The following summarizes the amortized cost and fair value of securities available-for-sale and securities held-to-maturity and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2015
Securities available-for-sale:
U.S. government sponsored agency obligations	$	97,905	$	1,218	$	(23	)	$	99,100
Obligations of state and political subdivisions:
Taxable	318		—		—			318
Tax-exempt	274,127		4,171		(567		)	277,731
SBA Pools	29,884		531		(2		)	30,413
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	303,208		4,212		(65		)	307,355
Privately issued	58,328		67		(198		)	58,197
Privately issued commercial mortgage-backed securities	19,222		20		(100		)	19,142
Corporate debt securities	88,200		421		(172		)	88,449
Total securities available-for-sale	$	871,192	$	10,640	$	(1,127	)	$	880,705

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Securities held-to-maturity	$	1,678	$	—	$	—	$	1,678

25

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
December 31, 2014
Securities available-for-sale:
U.S. government sponsored agency obligations	$	97,746	$	791	$	(179	)	$	98,358
Obligations of state and political subdivisions:
Taxable	397		—		—			397
Tax-exempt	229,404		3,578		(723		)	232,259
SBA Pools	33,824		209		(100		)	33,933
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	289,156		2,886		(283		)	291,759
Privately issued	18,814		27		(41		)	18,800
Privately issued commercial mortgage-backed securities	5,127		3		—			5,130
Corporate debt securities	60,206		209		(232		)	60,183
Total securities available-for-sale	$	734,674	$	7,703	$	(1,558	)	$	740,819

	Amortized Cost		Gross Unrecognized Gains		Gross Unrecognized Losses		Fair Value
Securities held-to-maturity	$	1,226	$	—	$	—	$	1,226

Proceeds from sales of securities and the associated gains and losses recorded in earnings are listed below:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Proceeds	$	28,300		$	28,285		$	53,050		$	82,496
Gross gains	403			248			412			248
Gross losses	(201		)	(4		)	(311		)	(2,314		)

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2015 are shown below. Contractual maturity is utilized for U.S. Government sponsored agency obligations, obligations of state and political subdivisions and corporate debt securities. Securities with multiple maturity dates are classified in the period of final maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2015
(Dollars in thousands)	Amortized Cost		Fair Value
Securities with contractual maturities:
Within one year	$	7,086	$	7,146
After one year through five years	156,992		158,923
After five years through ten years	197,634		199,479
After ten years	509,480		515,157
Total securities available-for-sale	$	871,192	$	880,705
Securities held-to-maturity:
After one year through five years	1,678		1,678
Total securities held-to-maturity	$	1,678	$	1,678

26

Securities with a carrying value of $396.7 million and $337.8 million were pledged at September 30, 2015 and December 31, 2014, respectively, to secure borrowings and deposits.

At September 30, 2015 and December 31, 2014, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders’ equity.

A summary of the Company’s investment securities available-for-sale in an unrealized loss position is as follows:

	Less than 12 Months					More than 12 Months					Total
(Dollars in thousands)	Fair Value		Unrealized losses			Fair Value		Unrealized losses			Fair Value		Unrealized losses
September 30, 2015
U.S. government sponsored agency obligations	$	14,977	$	(23	)	$	—	$	—		$	14,977	$	(23	)
Obligations of state and political subdivisions:
Tax-exempt	60,604		(405		)	8,188		(162		)	68,792		(567		)
SBA Pools	1,585		(2		)	—		—			1,585		(2		)
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	52,889		(65		)	—		—			52,889		(65		)
Privately issued	39,175		(198		)	—		—			39,175		(198		)
Privately issued commercial mortgage-backed securities	14,036		(100		)	—		—			14,036		(100		)
Corporate debt securities	32,325		(152		)	430		(20		)	32,755		(172		)
Total securities available-for-sale	$	215,591	$	(945	)	$	8,618	$	(182	)	$	224,209	$	(1,127	)
December 31, 2014
U.S. government sponsored agency obligations	$	—	$	—		$	14,821	$	(179	)	$	14,821	$	(179	)
Obligations of state and political subdivisions:
Tax-exempt	31,054		(260		)	33,650		(463		)	64,704		(723		)
SBA Pools	1,844		(4		)	17,682		(96		)	19,526		(100		)
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	36,261		(85		)	27,361		(198		)	63,622		(283		)
Privately issued	7,801		(41		)	8		—			7,809		(41		)
Corporate debt securities	22,520		(162		)	8,912		(70		)	31,432		(232		)
Total securities available-for-sale	$	99,480	$	(552	)	$	102,434	$	(1,006	)	$	201,914	$	(1,558	)

As of September 30, 2015, the Company’s security portfolio consisted of 337 securities, 77 of which were in an unrealized loss position. The unrealized losses for these securities resulted primarily from changes in benchmark U.S. Treasury interest rates. The Company expects full collection of the carrying amount of these securities and does not intend to sell the securities in an unrealized loss position nor does it believe it will be required to sell securities in an unrealized loss position before the value is recovered. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2015.

The unrealized losses are spread across asset classes, primarily in those securities carrying fixed interest rates. At September 30, 2015, the combination of these security asset class holdings in an unrealized loss position had an estimated fair value of $224.2 million with gross unrealized losses of $1.1 million. Unrealized losses in these security holdings were mainly impacted by increases in benchmark U.S. Treasury rates and, to a lesser extent, widened liquidity spreads in select assets classes since their respective acquisition dates.

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5.LOANS

Residential real estate loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30-year term, and in most cases, are extended to borrowers to finance their primary residence with both fixed-rate and adjustable-rate terms. The majority of these loans originated by the Company conform to secondary market underwriting standards and are sold within a short timeframe to unaffiliated third parties. As such, the credit underwriting standards adhere to the underwriting standards and documentation requirements established by the respective investor or correspondent bank.  Residential real estate loans also include home equity loans and lines of credit that are secured by a first or second lien on the borrower’s residence.  Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.  Home equity lines of credit are generally governed by the same lending policies and subject to the same credit risk as described previously for residential real estate loans.

Commercial real estate loans consist of term loans secured by a mortgage lien on the real property such as apartment buildings, office and industrial buildings, retail shopping centers, and farmland. The credit underwriting for both owner-occupied and non-owner occupied commercial real estate loans includes detailed market analysis, historical and projected cash flow analysis, appropriate equity margins, assessment of lessees and lessors, type of real estate and other analysis. Risk of loss is managed by adherence to standard loan policies that establish certain levels of performance prior to the extension of a loan to the borrower. Geographic diversification, as well as diversification across industries, are other means by which the risk of loss is managed by the Company.

Commercial and industrial loans include financing for commercial purposes in various lines of business, including manufacturing, service industry, professional service areas and agricultural.  The Company works with businesses to meet their short-term working capital needs while also providing long-term financing for their business plans. Credit risk is managed through standardized loan policies, established and authorized credit limits, centralized portfolio management and the diversification of market area and industries. The overall strength of the borrower is evaluated through the credit underwriting process and includes a variety of analytical activities including the review of historical and projected cash flows, historical financial performance, financial strength of the principals and guarantors, and collateral values, where applicable. Commercial and industrial loans are generally secured with the assets of the company and/or the personal guarantee of the business owners.

Real estate construction loans are term loans to individuals, companies or developers used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property.  Generally, these loans are for construction projects that have been either presold, preleased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in the project.

Consumer loans include loans made to individuals not secured by real estate, including loans secured by automobiles or watercraft, and personal unsecured loans. Risk elements in the consumer loan portfolio are primarily focused on the borrower’s cash flow and credit history, key indicators of the ability to repay and borrower credit scores. A certain level of security is provided through liens on automobile or watercraft titles, where applicable. Economic conditions that affect consumers in the Company’s markets have a direct impact on the credit quality of these loans. Higher levels of unemployment, lower levels of income growth and weaker economic growth are factors that may adversely impact consumer loan credit quality.

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Loans at September 30, 2015 and December 31, 2014 were as follows:

	Covered loans						Uncovered loans
(Dollars in thousands)	Accounted for under ASC 310-30		Excluded from ASC 310-30 accounting		Total covered loans		Accounted for under ASC 310-30		Excluded from ASC 310-30 accounting		Total uncovered loans		Total
September 30, 2015
Residential real estate	$	71,627	$	18,744	$	90,371	$	216,165	$	1,236,125	$	1,452,290	$	1,542,661
Commercial real estate	70,681		6,427		77,108		210,482		1,273,939		1,484,421		1,561,529
Commercial and industrial	8,729		5,167		13,896		20,715		1,176,002		1,196,717		1,210,613
Real estate construction	4,615		534		5,149		6,847		210,188		217,035		222,184
Consumer	103		2		105		9,699		154,797		164,496		164,601
Total	$	155,755	$	30,874	$	186,629	$	463,908	$	4,051,051	$	4,514,959	$	4,701,588	(1)
December 31, 2014
Residential real estate	$	86,515	$	21,711	$	108,226	$	239,523	$	1,186,489	$	1,426,012	$	1,534,238
Commercial real estate	160,886		25,776		186,662		190,148		1,120,790		1,310,938		1,497,600
Commercial and industrial	23,752		8,896		32,648		15,499		853,978		869,477		902,125
Real estate construction	8,415		974		9,389		8,309		123,377		131,686		141,075
Consumer	9,469		96		9,565		2,389		162,135		164,524		174,089
Total	$	289,037	$	57,453	$	346,490	$	455,868	$	3,446,769	$	3,902,637	$	4,249,127	(1)

(1) Reported net of deferred fees totaling $187 thousand and $4.6 million at September 30, 2015 and December 31, 2014, respectively.

Nonperforming Assets and Past Due Loans

Nonperforming assets consist of loans for which the accrual of interest has been discontinued, other real estate owned acquired through acquisitions, other real estate owned obtained through foreclosure and other repossessed assets.

Loans are considered past due or delinquent when the contractual principal or interest due in accordance with the terms of the loan agreement or any portion thereof remains unpaid after the due date of the scheduled payment. Loans outside of those accounted for under ASC 310-30 are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. The accrual of interest income is discontinued when a loan is placed in nonaccrual status and any payments received reduce the carrying value of the loan. A loan may be placed back on accrual status if all contractual payments have been received and collection of future principal and interest payments are no longer doubtful. Loans accounted for under ASC 310-30 are classified as performing, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the quarterly re-estimation of expected cash flows and is included in the resulting recognition of current period provision for loan losses or future yield adjustments.

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Information as to nonperforming assets was as follows:

(Dollars in thousands)	September 30, 2015		December 31, 2014
Uncovered nonperforming assets
Nonaccrual loans
Residential real estate	$	17,562	$	17,374
Commercial real estate	17,940		13,756
Commercial and industrial	9,941		3,550
Real estate construction	333		174
Consumer	264		257
Total nonaccrual loans	46,040		35,111
Other real estate owned and repossessed assets (1)	27,329		36,872
Total uncovered nonperforming assets	73,369		71,983
Covered nonperforming assets
Nonaccrual loans
Residential real estate	2,010		1,848
Commercial real estate	3,780		15,723
Commercial and industrial	1,678		3,560
Real estate construction	236		713
Consumer	2		13
Total nonaccrual loans	7,706		21,857
Other real estate owned and repossessed assets	5,621		10,719
Total covered nonperforming assets	13,327		32,576
Total nonperforming assets	$	86,696	$	104,559
Uncovered loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30
Residential real estate	$	62	$	12
Commercial and industrial	15		—
Consumer	119		41
Total loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	196	$	53

(1) Excludes closed branches and operating facilities.

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Loan delinquency, excluding loans accounted for under ASC 310-30 was as follows:

	September 30, 2015
(Dollars in thousands)	30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current		Total loans		90 days or more past due and still accruing
Uncovered loans, excluding loans accounted for under ASC 310-30
Residential real estate	$	4,056	$	1,581	$	7,560	$	13,197	$	1,222,928	$	1,236,125	$	62
Commercial real estate	4,780		1,603		12,361		18,744		1,255,195		1,273,939		—
Commercial and industrial	1,152		4,029		3,815		8,996		1,167,006		1,176,002		15
Real estate construction	—		—		199		199		209,989		210,188		—
Consumer	1,315		260		252		1,827		152,970		154,797		119
Total	$	11,303	$	7,473	$	24,187	$	42,963	$	4,008,088	$	4,051,051	$	196
Covered loans, excluding loans accounted for under ASC 310-30
Residential real estate	$	204	$	180	$	744	$	1,128	$	17,616	$	18,744	$	—
Commercial real estate	—		3		2,086		2,089		4,338		6,427		—
Commercial and industrial	7		—		1,675		1,682		3,485		5,167		—
Real estate construction	—		—		227		227		307		534		—
Consumer	—		—		—		—		2		2		—
Total	$	211	$	183	$	4,732	$	5,126	$	25,748	$	30,874	$	—

	December 31, 2014
(Dollars in thousands)	30-59 days past due		60-89 days past due		90 days or more past due		Total past due		Current		Total loans		90 days or more past due and still accruing
Uncovered loans, excluding loans accounted for under ASC 310-30
Residential real estate	$	11,709	$	2,044	$	9,593	$	23,346	$	1,163,143	$	1,186,489	$	12
Commercial real estate	4,870		1,083		11,333		17,286		1,103,504		1,120,790		—
Commercial and industrial	4,679		184		2,960		7,823		846,155		853,978		—
Real estate construction	1,004		136		174		1,314		122,063		123,377		—
Consumer	964		152		150		1,266		160,869		162,135		41
Total	$	23,226	$	3,599	$	24,210	$	51,035	$	3,395,734	$	3,446,769	$	53
Covered loans, excluding loans accounted for under ASC 310-30
Residential real estate	$	238	$	35	$	1,179	$	1,452	$	20,259	$	21,711	$	—
Commercial real estate	—		—		4,569		4,569		21,207		25,776		—
Commercial and industrial	373		7		2,923		3,303		5,593		8,896		—
Real estate construction	—		—		710		710		264		974		—
Consumer	—		—		2		2		94		96		—
Total	$	611	$	42	$	9,383	$	10,036	$	47,417	$	57,453	$	—

Impaired Loans

A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts    due according to the contractual terms of the loan agreement. Impaired loans included nonperforming loans (including nonperforming TDRs) and performing TDRs. Impaired loans are accounted for at the lower of the present value of expected cash flows or the estimated fair value of the collateral. When the present value of expected cash flows or the fair value of the collateral of an impaired loan not accounted for under ASC 310-30 is less than the amount of unpaid principal outstanding on the loan, the recorded principal balance of the loan is reduced to its carrying value through either a specific allowance for loan loss or a partial charge-off of the loan balance. Information as to total impaired loans (both individually and collectively evaluated for impairment) is as follows:

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(Dollars in thousands)	September 30, 2015		December 31, 2014
Uncovered
Nonaccrual loans	$	46,040	$	35,111
Performing troubled debt restructurings:
Residential real estate	2,402		1,368
Commercial real estate	13,973		3,785
Commercial and industrial	3,433		840
Real estate construction	197		90
Consumer	235		234
Total uncovered performing troubled debt restructurings	20,240		6,317
Total uncovered impaired loans	$	66,280	$	41,428
Covered
Nonaccrual loans	$	7,706	$	21,857
Performing troubled debt restructurings:
Residential real estate	3,185		3,046
Commercial real estate	1,709		9,017
Commercial and industrial	204		1,137
Real estate construction	298		264
Total covered performing troubled debt restructurings	5,396		13,464
Total covered impaired loans	$	13,102	$	35,321

Troubled Debt Restructurings

The Company assesses all loan modifications to determine whether a modification constitutes a troubled debt restructuring (“TDR”). For loans excluded from ASC 310-30 accounting, a modification is considered a TDR when a borrower is experiencing financial difficulties and the Company grants a concession to the borrower.  For loans accounted for individually under ASC 310-30, a modification is considered a TDR when a borrower is experiencing financial difficulties and the effective yield after the modification is less than the effective yield at the time the loan was acquired in association with consideration of qualitative factors included within ASC 310-40, “Receivables — Troubled Debt Restructurings by Creditors” (“ASC 310-40”).  All TDRs are considered impaired loans.  The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, is considered in the determination of an appropriate level of charge off and/or allowance for loan losses.

As of September 30, 2015, there were $17.6 million of nonperforming TDRs and $25.6 million of performing TDRs included in impaired loans.  As of December 31, 2014, there were $25.0 million of nonperforming TDRs and $19.8 million of performing TDRs included in impaired loans.  All TDRs are considered impaired loans in the calendar year of their restructuring.  In subsequent years, a restructured obligation modified at a market rate and compliant with its modified terms for a minimum period of six months is no longer reported as a TDR. A loan that has been modified at a rate other than market will return to performing status if it satisfies the six month performance requirement; however, it will continue to be reported as a TDR and considered impaired. If a TDR is subsequently restructured under current market terms, no cumulative concession has been granted to the borrower and the borrower is not experiencing financial difficulties, which is documented by a current credit evaluation, the loan is no longer required to be reported as a TDR.

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The following tables present the recorded investment of loans modified in TDRs during the three and nine months ended September 30, 2015 and 2014 by type of concession granted.  In cases where more than one type of concession was granted, the loans were categorized based on the most significant concession.

	Concession type											Financial effects of modification
(Dollars in thousands)	Principal deferral		Principal reduction (1)		Interest rate		Forbearance agreement		Total  number of loans	Total recorded investment at September 30, 2015		Net charge-offs (recoveries)			Provision (benefit) for loan losses (2)
For the three months ended September 30, 2015
Uncovered
Residential real estate	$	1,131	$	5	$	149	$	—	18	$	1,285	$	13		$	5
Commercial real estate	14		—		460		557		8	1,031		—			30
Commercial and industrial	465		—		747		—		16	1,212		—			297
Real estate construction	112		—		—		—		1	112		—			(2		)
Consumer	12		—		—		—		1	12		4			4
Total uncovered	$	1,734	$	5	$	1,356	$	557	44	$	3,652	$	17		$	334
Covered
Residential real estate	$	83	$	16	$	—	$	—	2	$	99	$	—		$	(1	)
Commercial real estate	—		—		36		—		2	36		34			30
Total covered	$	83	$	16	$	36	$	—	4	$	135	$	34		$	29
Total loans	$	1,817	$	21	$	1,392	$	557	48	$	3,787	$	51		$	363
For the nine months ended September 30, 2015
Uncovered
Residential real estate	$	1,510	$	118	$	865	$	—	42	$	2,493	$	57		$	191
Commercial real estate	101		—		2,222		1,789		21	4,112		96			205
Commercial and industrial	1,007		—		1,876		159		37	3,042		201			544
Real estate construction	155		—		69		22		4	246		—			103
Consumer	44		—		—		—		3	44		4			4
Total uncovered	$	2,817	$	118	$	5,032	$	1,970	107	$	9,937	$	358		$	1,047
Covered
Residential real estate	$	618	$	16	$	183	$	—	10	$	817	$	5		$	69
Commercial real estate	—		—		2,045		—		9	2,045		41			73
Commercial and industrial	—		—		1		—		1	1		—			(3		)
Real estate construction	45		—		9		—		2	54		(2		)	(2		)
Total covered	$	663	$	16	$	2,238	$	—	22	$	2,917	$	44		$	137
Total loans	$	3,480	$	134	$	7,270	$	1,970	129	$	12,854	$	402		$	1,184

(1) Loan forgiveness related to loans modified in TDRs for the three and nine months ended September 30, 2015 totaled $21 thousand and $209 thousand, respectively.

(2) The provision for loan losses for covered loans is partially offset by the build of an associated FDIC indemnification asset on covered loans.

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	Concession type											Financial effects of modification
(Dollars in thousands)	Principal deferral		Principal Reduction (1)		Interest rate		Forbearance agreement		Total  number of loans	Total recorded investment at September 30, 2014		Net  charge-offs (recoveries)			Provision (benefit) for loan losses (2)
For the three months ended September 30, 2014
Uncovered
Residential real estate	$	1	$	166	$	486	$	—	8	$	653	$	18		$	29
Commercial real estate	435		—		258		126		7	819		(18		)	(18		)
Commercial and industrial	—		—		35		—		2	35		—			(31		)
Consumer	27		—		—		—		1	27		—			—
Total uncovered	$	463	$	166	$	779	$	126	18	$	1,534	$	—		$	(20	)
Covered
Residential real estate	$	191	$	14	$	—	$	—	4	$	205	$	—		$	(1	)
Commercial and industrial	—		—		62		—		2	62		—			2
Total covered	$	191	$	14	$	62	$	—	6	$	267	$	—		$	1
Total loans	$	654	$	180	$	841	$	126	24	$	1,801	$	—		$	(19	)
For the nine months ended September 30, 2014
Uncovered
Residential real estate	$	144	$	384	$	714	$	135	23	$	1,377	$	65		$	216
Commercial real estate	435		—		979		1,159		12	$	2,573	(46		)	431
Commercial and industrial	36		—		93		112		12	$	241	—			—
Consumer	27		83		—		—		3	110		2			21
Total uncovered	$	642	$	467	$	1,786	$	1,406	50	$	4,301	$	21		$	668
Covered
Residential real estate	$	300	$	28	$	262	$	—	17	$	590	$	6		$	14
Commercial real estate	—		—		643		412		3	$	1,055	—			70
Commercial and industrial	—		—		253		92		10	345		—			8
Total covered	$	300	$	28	$	1,158	$	504	30	$	1,990	$	6		$	92
Total loans	$	942	$	495	$	2,944	$	1,910	80	$	6,291	$	27		$	760

(1) Loan forgiveness related to loans modified in TDRs for the three and nine months ended September 30, 2014 totaled $273 thousand and $677 thousand, respectively.

(2) The provision for loan losses for covered loans is partially offset by the build of an associated FDIC indemnification asset on covered loans.

When a modification qualifies as a TDR and was initially individually accounted for under ASC 310-30, the loan is required to be moved from ASC 310-30 accounting and accounted for under ASC 310-40.  In order to accomplish the transfer of the accounting for the TDR from ASC 310-30 to ASC 310-40, the loan is essentially retained in the ASC 310-30 accounting model and subject to the quarterly cash flow re-estimation process. Similar to loans accounted for under ASC 310-30, deterioration in expected cash flows result in the recognition of allowance for loan losses. However, unlike loans accounted for under ASC 310-30, improvements in estimated cash flows on these loans result only in recapturing previously recognized allowance for loan losses and the yield remains at the last yield recognized under ASC 310-30.

On an ongoing basis, the Company monitors the performance of TDRs to their modified terms. The following table presents the number of loans modified in TDRs during the previous 12 months for which there was payment default during the three and nine months ended September 30, 2015 and 2014, including the recorded investment as of September 30, 2015 and 2014.  A payment on a TDR is considered to be in default once it is greater than 30 days past due.

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	For the three months ended September 30, 2015					For the nine months ended September 30, 2015
(Dollars in thousands)	Total number of loans	Total recorded investment at September 30, 2015		Charged off following a subsequent default		Total number of loans	Total recorded investment at September 30, 2015		Charged off following a subsequent default
Uncovered
Residential real estate	14	$	812	$	53	16	$	812	$	68
Commercial real estate	8	2,176		—		8	2,176		434
Commercial and industrial	4	1		9		4	1		9
Total uncovered	26	2,989		62		28	2,989		511
Covered
Residential real estate	2	71		24		2	71		24
Commercial real estate	1	129		—		1	129		—
Commercial and industrial	1	1		—		1	1		—
Total covered	4	201		24		4	201		24
Total loans	30	$	3,190	$	86	32	$	3,190	$	535

	For the three months ended September 30, 2014					For the nine months ended September 30, 2014
(Dollars in thousands)	Total number of loans	Total recorded investment at September 30, 2014		Charged off following a subsequent default		Total number of loans	Total recorded investment at September 30, 2014		Charged off following a subsequent default
Uncovered
Residential real estate	11	$	700	$	8	21	$	1,345	$	119
Commercial real estate	6	1,739		—		8	3,013		323
Commercial and industrial	1	135		—		2	135		—
Total uncovered	18	2,574		8		31	4,493		442
Covered
Residential real estate	6	29		—		9	242		12
Commercial real estate	2	512		—		6	637		—
Commercial and industrial	3	101		4		10	235		6
Real estate construction	—	—		—		1	364		483
Total covered	11	642		4		26	1,478		501
Total loans	29	$	3,216	$	12	57	$	5,971	$	943

At September 30, 2015, commitments to lend additional funds to borrowers whose terms have been modified in TDRs totaled $275 thousand.

The terms of certain other loans that were modified during the years ended September 30, 2015 and 2014 that did not meet the definition of a TDR generally involved a modification of the terms of a loan to borrowers who were not deemed to be experiencing financial difficulties or a loan accounted for under ASC 310-30 that did not result in a lower effective yield than at the date of acquisition after the modification in association with consideration of qualitative factors included within ASC 310-40. The evaluation of whether or not a borrower is deemed to be experiencing financial difficulty is completed during loan committee meetings at the time of the loan approval.

Credit Quality Indicators

Credit risk monitoring and management is a continuous process to manage the quality of the loan portfolio.

The Company categorizes commercial and industrial, commercial real estate and real estate construction loans into risk categories based on relevant information about the ability of borrowers to service their debt including, current financial information, historical payment experience, credit documentation and current economic trends, among other factors.  The risk rating system is used as a tool to analyze and monitor loan portfolio quality.  Risk ratings meeting an internally specified

35

exposure threshold are updated annually, or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan.  The following describes each risk category:

Pass:  Includes all loans without weaknesses or potential weaknesses identified in the categories of special mention, substandard or doubtful.

Special Mention:  Loans with potential credit weakness or credit deficiency, which, if not corrected, pose an unwarranted financial risk that could weaken the loan by adversely impacting the future repayment ability of the borrower.

Substandard:  Loans with a well-defined weakness, or weaknesses, such as loans to borrowers who may be experiencing losses from operations or inadequate liquidity of a degree and duration that jeopardizes the orderly repayment of the loan.  Substandard loans also are distinguished by the distinct possibility of loss in the future if these weaknesses are not corrected.

Doubtful:  Loans with all the characteristics of a loan classified as Substandard, with the added characteristic that credit weaknesses make collection in full highly questionable and improbable.

Commercial and industrial, commercial real estate and real estate construction loans by credit risk category were as follows:

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful (1)		Total
September 30, 2015
Uncovered loans
Commercial real estate	$	1,328,955	$	64,746	$	90,212	$	508	$	1,484,421
Commercial and industrial	1,121,534		30,474		44,649		60		1,196,717
Real estate construction	212,036		154		4,845		—		217,035
Total	$	2,662,525	$	95,374	$	139,706	$	568	$	2,898,173
Covered loans
Commercial real estate	$	45,069	$	5,257	$	26,782	$	—	$	77,108
Commercial and industrial	5,792		536		7,568		—		13,896
Real estate construction	3,164		51		1,934		—		5,149
Total	$	54,025	$	5,844	$	36,284	$	—	$	96,153
December 31, 2014
Uncovered loans
Commercial real estate	$	1,153,132	$	63,567	$	94,239	$	—	$	1,310,938
Commercial and industrial	824,239		29,511		15,727		—		869,477
Real estate construction	123,822		1,981		5,883		—		131,686
Total	$	2,101,193	$	95,059	$	115,849	$	—	$	2,312,101
Covered loans
Commercial real estate	$	102,952	$	16,073	$	67,637	$	—	$	186,662
Commercial and industrial	16,718		1,875		14,055		—		32,648
Real estate construction	3,817		792		4,780		—		9,389
Total	$	123,487	$	18,740	$	86,472	$	—	$	228,699

(1)Prior to January 1, 2015, all nonaccrual loans were included in the “Doubtful” risk category. After further review of regulatory guidance, we have reclassified nonaccrual loans with a determinable value to the “Substandard” risk category; therefore, “Substandard” now includes accrual and nonaccrual loans. This change in classification has been made retrospectively and the reclassification is presented within the December 31, 2014 disclosure.

36

For residential real estate loans and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. Residential real estate loans and consumer loans secured by a residence where the debt has been discharged but the borrower continues to make payments are considered nonperforming. The following table presents residential real estate and consumer loans by credit quality:

(Dollars in thousands)	Performing		Nonperforming		Total
September 30, 2015
Uncovered loans
Residential real estate	$	1,434,728	$	17,562	$	1,452,290
Consumer	164,232		264		164,496
Total	$	1,598,960	$	17,826	$	1,616,786
Covered loans
Residential real estate	$	88,361	$	2,010	$	90,371
Consumer	103		2		105
Total	$	88,464	$	2,012	$	90,476
December 31, 2014
Uncovered
Residential real estate	$	1,408,638	$	17,374	$	1,426,012
Consumer	164,267		257		164,524
Total	$	1,572,905	$	17,631	$	1,590,536
Covered loans
Residential real estate	$	106,378	$	1,848	$	108,226
Consumer	9,552		13		9,565
Total	$	115,930	$	1,861	$	117,791

6.  ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses represents management’s assessment of probable, incurred credit losses in the loan portfolio. The allowance for loan losses consists of specific allowances, based on individual evaluation of certain loans, and allowances for homogeneous pools of loans with similar risk characteristics. Management’s evaluation in establishing the adequacy of the allowance includes evaluation of actual past loan loss experience, probable incurred losses in the portfolio, adverse situations that may affect a specific borrower’s ability to repay (including the timing of future payments), the estimated value of any underlying collateral, composition of the loan portfolio, economic conditions, and other pertinent factors, such as periodic internal and external evaluations of delinquent, nonaccrual, and classified loans. The evaluation is inherently subjective as it requires utilizing material estimates. The evaluation of these factors is the responsibility of certain senior officers from the credit administration, finance, and lending areas.

The Company established an allowance for loan losses associated with purchased credit impaired loans (accounted for under ASC 310-30) based on credit deterioration subsequent to the acquisition date. The Company re-estimates cash flows expected to be collected for purchased credit impaired loans on a quarterly basis, with any decline in expected cash flows recorded as provision for loan losses on a discounted basis during the period. For any increases in cash flows expected to be collected, the Company first reverses any previously recorded allowance for loan loss, then adjusts the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.

For loans not accounted for under ASC 310-30, the Company individually assesses for impairment all nonaccrual loans and TDRs.

37

Information as to impaired loans individually evaluated for impairment is as follows:

(Dollars in thousands)	Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment				Contractual principal balance		Related allowance
September 30, 2015
Uncovered individually evaluated impaired loans
Residential real estate	$	14,797	$	5,167	$	19,964			$	25,058	$	1,466
Commercial real estate	17,282		14,631		31,913		(1	)	48,641		2,225
Commercial and industrial	10,119		3,255		13,374		(1	)	16,436		817
Real estate construction	418		112		530				660		103
Consumer	354		145		499		(1	)	875		65
Total uncovered individually evaluated impaired loans	$	42,970	$	23,310	$	66,280			$	91,670	$	4,676
Covered individually evaluated impaired loans
Residential real estate	$	2,149	$	3,046	$	5,195			$	6,691	$	448
Commercial real estate	3,361		2,128		5,489		(1	)	8,851		302
Commercial and industrial	1,654		228		1,882		(1	)	3,391		41
Real estate construction	489		45		534				760		—
Consumer	2		—		2		(1	)	11		—
Total covered individually evaluated impaired loans	$	7,655	$	5,447	$	13,102			$	19,704	$	791
December 31, 2014
Uncovered individually evaluated impaired loans
Residential real estate	$	14,316	$	4,268	$	18,584			$	23,080	$	1,110
Commercial real estate	7,609		5,956		13,565				17,016		1,276
Commercial and industrial	915		1,884		2,799				2,807		982
Real estate construction	174		—		174				174		—
Consumer	296		176		472				610		82
Total uncovered individually evaluated impaired loans	$	23,310	$	12,284	$	35,594			$	43,687	$	3,450
Covered individually evaluated impaired loans
Residential real estate	$	2,155	$	2,583	$	4,738			$	6,388	$	417
Commercial real estate	10,400		11,985		22,385				28,755		1,277
Commercial and industrial	1,545		779		2,324				2,668		109
Real estate construction	670		—		670				994		—
Consumer	11		1		12				39		—
Total covered individually evaluated impaired loans	$	14,781	$	15,348	$	30,129			$	38,844	$	1,803

(1) The September 30, 2015 total uncovered recorded investment includes $11.0 million, $300 thousand and $22 thousand of commercial real estate, commercial and industrial and consumer, respectively, of loans that prior to July 1, 2015 were included within covered loans due to the expiration of the related FDIC loss sharing agreement.

38

	For the three months ended September 30, 2015				For the nine months ended September 30, 2015
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment (1)		Interest income recognized
Uncovered individually evaluated impaired loans
Residential real estate	$	20,808	$	388	$	21,235	$	877
Commercial real estate	31,837		1,255		32,001		2,790
Commercial and industrial	13,776		164		14,856		586
Real estate construction	631		14		683		39
Consumer	596		10		674		37
Total uncovered individually evaluated impaired loans	$	67,648	$	1,831	$	69,449	$	4,329
Covered individually evaluated impaired loans
Residential real estate	$	5,249	$	87	$	5,325	$	248
Commercial real estate	6,061		110		6,522		318
Commercial and industrial	2,067		34		2,412		134
Real estate construction	572		12		768		90
Consumer	3		—		3		1
Total covered individually evaluated impaired loans	$	13,952	$	243	$	15,030	$	791
(1) The average recorded investment includes $11.4 million of loans that prior to July 1, 2015 were included within covered loans due to the expiration of the related FDIC loss sharing agreement, of which $11.0 million are commercial and industrial.

	For the three months ended September 30, 2014				For the nine months ended September 30, 2014
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Uncovered individually evaluated impaired loans
Residential real estate	$	17,257	$	177	$	17,387	$	505
Commercial real estate	10,365		74		11,324		586
Commercial and industrial	13,130		124		13,452		497
Consumer	308		7		288		14
Total uncovered individually evaluated impaired loans	$	41,060	$	382	$	42,451	$	1,602
Covered individually evaluated impaired loans
Residential real estate	$	4,537	$	69	$	4,573	$	206
Commercial real estate	17,344		294		17,488		806
Commercial and industrial	1,789		18		1,795		51
Real estate construction	767		11		965		52
Consumer	14		1		19		3
Total covered individually evaluated impaired loans	$	24,451	$	393	$	24,840	$	1,118

Uncovered Loans

Changes in the allowance for loan losses and the allocation of the allowance for uncovered loans were as follows:

39

(Dollars in thousands)	Residential real estate			Commercial real estate			Commercial and industrial			Real estate construction			Consumer			Total
For the three months ended September 30, 2015
Allowance for loan losses - uncovered:
Balance at beginning of period	$	11,088		$	12,182		$	10,745		$	1,448		$	1,103		$	36,566
Transfer in from covered (1)	34			2,778			398			338			31			3,579
Provision (benefit) for loan losses	(280		)	335			3,241			41			329			3,666
Gross charge-offs	(836		)	(864		)	(375		)	(57		)	(631		)	(2,763		)
Recoveries	1,819			1,538			195			374			106			4,032
Net (charge-offs) recoveries	983			674			(180		)	317			(525		)	1,269
Ending allowance for loan losses	$	11,825		$	15,969		$	14,204		$	2,144		$	938		$	45,080
For the nine months ended September 30, 2015
Allowance for loan losses - uncovered:
Balance at beginning of period	$	12,193		$	11,128		$	7,835		$	1,599		$	1,064		$	33,819
Transfer in from covered (1)	34			2,778			398			338			31			3,579
Provision (benefit) for loan losses	379			382			6,607			(88		)	867			8,147
Gross charge-offs	(4,054		)	(5,411		)	(2,377		)	(364		)	(1,210		)	(13,416		)
Recoveries	3,273			7,092			1,741			659			186			12,951
Net (charge-offs) recoveries	(781		)	1,681			(636		)	295			(1,024		)	(465		)
Ending allowance for loan losses	$	11,825		$	15,969		$	14,204		$	2,144		$	938		$	45,080
As of September 30, 2015
Allowance for loan losses - uncovered:
Individually evaluated for impairment	$	1,466		$	2,225		$	817		$	103		$	65		$	4,676
Collectively evaluated for impairment	5,221			4,881			12,387			711			773			23,973
Accounted for under ASC 310-30	5,138			8,863			1,000			1,330			100			16,431
Allowance for loan losses - uncovered:	$	11,825		$	15,969		$	14,204		$	2,144		$	938		$	45,080
Balance of uncovered loans:
Individually evaluated for impairment	$	19,964		$	31,913		$	13,374		$	530		$	499		$	66,280
Collectively evaluated for impairment	1,216,161			1,242,026			1,162,628			209,658			154,298			3,984,771
Accounted for under ASC 310-30	216,165			210,482			20,715			6,847			9,699			463,908
Total uncovered loans	$	1,452,290		$	1,484,421		$	1,196,717		$	217,035		$	164,496		$	4,514,959
For the three months ended September 30, 2014
Allowance for loan losses - uncovered:
Balance at beginning of period	$	9,750		$	7,846		$	5,140		$	1,398		$	226		$	24,360
Provision for loan losses	1,943			3,176			2,363			178			124			7,784
Gross charge-offs	(1,597		)	(1,783		)	(826		)	(210		)	(55		)	(4,471		)
Recoveries	800			1,017			79			—			323			2,219
Net (charge-offs) recoveries	(797		)	(766		)	(747		)	(210		)	268			(2,252		)
Ending allowance for loan losses	$	10,896		$	10,256		$	6,756		$	1,366		$	618		$	29,892
For the nine months ended September 30, 2014
Allowance for loan losses - uncovered:
Balance at beginning of period	$	7,708		$	4,267		$	3,404		$	2,027		$	340		$	17,746
Provision (benefit) for loan losses	5,502			9,100			4,124			(1,306		)	7			17,427
Gross charge-offs	(4,414		)	(6,612		)	(1,452		)	(319		)	(179		)	(12,976		)
Recoveries	2,100			3,501			680			964			450			7,695
Net (charge-offs) recoveries	(2,314		)	(3,111		)	(772		)	645			271			(5,281		)
Ending allowance for loan losses	$	10,896		$	10,256		$	6,756		$	1,366		$	618		$	29,892
(1) Effective July 1, 2015, the first of our four non-single family FDIC loss share agreements expired, therefore, the balance of the loans and the related allowance for loan losses were reclassified to uncovered.

40

(Dollars in thousands)	Residential real estate		Commercial real estate		Commercial and industrial		Real estate construction		Consumer		Total
As of December 31, 2014
Allowance for loan losses - uncovered:
Individually evaluated for impairment	$	1,110	$	1,276	$	982	$	—	$	82	$	3,450
Collectively evaluated for impairment	4,850		4,623		5,968		649		820		16,910
Accounted for under ASC 310-30	6,233		5,229		885		950		162		13,459
Allowance for loan losses - uncovered:	$	12,193	$	11,128	$	7,835	$	1,599	$	1,064	$	33,819
Balance of uncovered loans:
Individually evaluated for impairment	$	18,584	$	13,565	$	2,799	$	174	$	472	$	35,594
Collectively evaluated for impairment	1,167,905		1,107,225		851,179		123,203		161,663		3,411,175
Accounted for under ASC 310-30	239,523		190,148		15,499		8,309		2,389		455,868
Total uncovered loans	$	1,426,012	$	1,310,938	$	869,477	$	131,686	$	164,524	$	3,902,637

Covered Loans

Changes in the allowance and the allocation of the allowance for covered loans were as follows:

41

(Dollars in thousands)	Residential real estate			Commercial real estate			Commercial and industrial			Real estate construction			Consumer			Total
For the three months ended September 30, 2015
Allowance for loan losses - covered:
Balance at beginning of period	$	4,096		$	9,166		$	2,093		$	954		$	31		$	16,340
Transfer out to uncovered (1)	(34		)	(2,778		)	(398		)	(338		)	(31		)	(3,579		)
Benefit for loan losses	(238		)	(1,413		)	(1,132		)	(70		)	(113		)	(2,966		)
Gross charge-offs	(218		)	(861		)	(392		)	(3		)	—			(1,474		)
Recoveries	167			985			1,138			29			117			2,436
Net (charge-offs) recoveries	(51		)	124			746			26			117			962
Ending allowance for loan losses	$	3,773		$	5,099		$	1,309		$	572		$	4		$	10,757
For the nine months ended September 30, 2015
Allowance for loan losses - covered:
Balance at beginning of period	$	3,981		$	13,663		$	2,577		$	1,086		$	46		$	21,353
Transfer out to uncovered (1)	(34		)	(2,778		)	(398		)	(338		)	(31		)	(3,579		)
Provision (benefit) for loan losses	(87		)	(10,113		)	(2,690		)	256			(133		)	(12,767		)
Gross charge-offs	(694		)	(5,449		)	(2,483		)	(965		)	(165		)	(9,756		)
Recoveries	607			9,776			4,303			533			287			15,506
Net (charge-offs) recoveries	(87		)	4,327			1,820			(432		)	122			5,750
Ending allowance for loan losses	$	3,773		$	5,099		$	1,309		$	572		$	4		$	10,757
As of September 30, 2015
Allowance for loan losses - covered:
Individually evaluated for impairment	$	448		$	302		$	41		$	—		$	—		$	791
Collectively evaluated for impairment	87			7			33			—			—			127
Accounted for under ASC 310-30	3,238			4,790			1,235			572			4			9,839
Allowance for loan losses - covered:	$	3,773		$	5,099		$	1,309		$	572		$	4		$	10,757
Balance of covered loans:
Individually evaluated for impairment	$	5,195		$	5,489		$	1,882		$	534		$	2		$	13,102
Collectively evaluated for impairment	13,549			938			3,285			—			—			17,772
Accounted for under ASC 310-30	71,627			70,681			8,729			4,615			103			155,755
Total covered loans	$	90,371		$	77,108		$	13,896		$	5,149		$	105		$	186,629
For the three months ended September 30, 2014
Allowance for loan losses - covered:
Balance at beginning of period	$	5,312		$	21,275		$	4,540		$	1,519		$	97		$	32,743
Benefit for loan losses	(1,412		)	(3,191		)	(1,132		)	(500		)	(40		)	(6,275		)
Gross charge-offs	(371		)	(3,106		)	(565		)	(219		)	(71		)	(4,332		)
Recoveries	558			1,585			1,067			352			70			3,632
Net (charge-offs) recoveries	187			(1,521		)	502			133			(1		)	(700		)
Ending allowance for loan losses	$	4,087		$	16,563		$	3,910		$	1,152		$	56		$	25,768
For the nine months ended September 30, 2014
Allowance for loan losses - covered:
Balance at beginning of period	$	4,696		$	26,394		$	7,227		$	1,984		$	80		$	40,381
Benefit for loan losses	(629		)	(11,030		)	(3,633		)	(678		)	(124		)	(16,094		)
Gross charge-offs	(1,646		)	(6,301		)	(3,092		)	(1,223		)	(148		)	(12,410		)
Recoveries	1,666			7,500			3,408			1,069			248			13,891
Net (charge-offs) recoveries	20			1,199			316			(154		)	100			1,481
Ending allowance for loan losses	$	4,087		$	16,563		$	3,910		$	1,152		$	56		$	25,768
(1) Effective July 1, 2015, the first of our four non-single family FDIC loss share agreements expired, therefore, the balance of the loans and the related allowance for loan losses were reclassified to uncovered.

42

(Dollars in thousands)	Residential real estate		Commercial real estate		Commercial and industrial		Real estate construction		Consumer		Total
As of December 31, 2014
Allowance for loan losses - uncovered:
Individually evaluated for impairment	$	417	$	1,277	$	109	$	—	$	—	$	1,803
Collectively evaluated for impairment	123		57		89		7		1		277
Accounted for under ASC 310-30	3,441		12,329		2,379		1,079		45		19,273
Allowance for loan losses - uncovered:	$	3,981	$	13,663	$	2,577	$	1,086	$	46	$	21,353
Balance of uncovered loans:
Individually evaluated for impairment	$	4,738	$	22,385	$	2,324	$	670	$	12	$	30,129
Collectively evaluated for impairment	16,973		3,391		6,572		304		84		27,324
Accounted for under ASC 310-30	86,515		160,886		23,752		8,415		9,469		289,037
Total uncovered loans	$	108,226	$	186,662	$	32,648	$	9,389	$	9,565	$	346,490

7.  ACQUIRED LOANS AND LOSS SHARE ACCOUNTING

A significant amount of loans acquired in the CF Bancorp and First Banking Center acquisitions during the year 2010 and the Peoples State Bank and Community Central Bank acquisitions during the year 2011 were acquired with loss sharing agreements with the FDIC, whereby the FDIC generally reimburses the Bank for the 80% of losses incurred.  The CF Bancorp, First Banking Center and Peoples State Bank loss share agreements also include provisions where a clawback payment, calculated using formulas included within the contracts, is to be made to the FDIC 10 years and 45 days following the acquisition in the event actual losses fail to reach stated levels.  The estimated FDIC clawback liability totaled $27.3 million ($24.6 million related to the CF Bancorp acquisition and $2.7 million related to the First Banking Center acquisition) at September 30, 2015 compared to $26.9 million ($22.6 million related to the CF Bancorp acquisition, $4.3 million related to the First Banking Center acquisition and $4 thousand related to the Peoples State Bank acquisition) at December 31, 2014.

Acquired loans were recorded at fair value as of the acquisition date, which includes loans acquired in each FDIC-assisted acquisition and in the First Place Bank, Talmer West Bank and First of Huron, Corp. acquisitions.  At the acquisition date, where a loan exhibits evidence of credit deterioration since origination and it is probable at the date of acquisition that the Company will not collect all principal and interest payments in accordance with the terms of the loan agreement, the Company accounts for the loan under ASC 310-30 and recognizes the expected shortfall of expected future cash flows, as compared to the contractual amount due, as a nonaccretable discount. Any excess of the net present value of expected future cash flows over the acquisition date fair value is recognized as the accretable discount, or accretable yield.  We recognize accretion of the accretable discount as interest income over the expected remaining life of the purchased loan.  Fair value discounts/premiums created on acquired loans accounted for outside the scope of ASC 310-30 are accounted for under ASC 310-20 and are accreted/amortized into interest income over the remaining term of the loan as an adjustment to the related loans yield.

43

Changes in the carrying amount of accretable discount for purchased loans accounted for under ASC 310-30 were as follows:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Balance at beginning of period	$	260,064		$	297,420		$	277,058		$	302,287
Additions due to acquisitions	—			—			5,268			32,764
Discount accretion	(17,702		)	(22,931		)	(57,908		)	(69,938		)
Reclassifications from nonaccretable discount and other additions to accretable discount due to results of cash flow re-estimations	16,083			31,988			67,156			72,895
Other activity, net (1)	(16,380		)	(15,980		)	(49,509		)	(47,511		)
Balance at end of period	$	242,065		$	290,497		$	242,065		$	290,497

(1) Primarily includes changes in the accretable discount due to loan payoffs, foreclosures and charge-offs.

For loans accounted for under ASC 310-30, the Company remeasures expected cash flows on a quarterly basis.  For loans where the remeasurement process results in a decline in expected cash flows, impairment is recorded.  To the extent impairment is recorded on covered loans, the indemnification asset is increased to reflect anticipated future cash to be received from the FDIC.  Alternatively, when a loan’s remeasurement results in an increase in expected cash flows, the effective yield of the related loan is increased through an addition to the accretable discount.  To the extent improvement relates to covered loans, the indemnification asset is first reduced by the writing off of any indemnification asset related to impairment previously recorded with any remaining indemnification asset accreting off over the shorter of the expected term of the loan or the remaining life of the related loss-sharing agreement.

The total identified improvement in the cash flow expectations resulting in yield adjustments on a prospective basis during the three months ended September 30, 2015 and 2014 for both covered and uncovered purchased credit impaired loans was $16.1 million and $32.0 million, respectively.  During the nine months ended September 30, 2015 and 2014, the total identified improvement in the cash flow expectations was $67.2 million and $72.9 million respectively. The Company also identified declines in the cash flow expectations of certain loans.  A decline in the present value of current expected cash flows compared to the previously estimated expected cash flows, due in any part to change in credit, is referred to as credit impairment and recorded as provision for loan losses during the period.  Declines in the present value of expected cash flows only from the expected timing of such cash flows is referred to as timing impairment and recognized prospectively as a decrease in yield on the loan.

Below is the composition of the recorded investment for loans accounted for under ASC 310-30 at September 30, 2015 and December 31, 2014.

(Dollars in thousands)	September 30, 2015			December 31, 2014
Contractual cash flows	$	1,085,498		$	1,281,482
Non-accretable difference	(223,770		)	(259,519		)
Accretable yield	(242,065		)	(277,058		)
Loans accounted for under ASC 310-30	$	619,663		$	744,905

44

The following table details the components and impact of the provision for loan losses on covered loans and the related FDIC loss sharing income.

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Benefit for loan losses - covered:
Net impairment (benefit) recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	$	24		$	(1,329	)	$	2,962		$	1,036
Additional benefit recorded, net of charge-offs, for covered loans	(2,990		)	(4,946		)	(15,729		)	(17,130		)
Total benefit for loan losses-covered	$	(2,966	)	$	(6,275	)	$	(12,767	)	$	(16,094	)
Less: FDIC loss share income:
Income (expense) recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	(40		)	176			1,002			3,680
Expense recorded, to offset benefit, for covered loans	(1,801		)	(2,978		)	(10,125		)	(10,445		)
Total loss sharing expense due to provision for loan losses-covered	(1,841		)	(2,802		)	(9,123		)	(6,765		)
Net (increase) decrease to income before taxes:
Net (income) expense recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	64			(1,505		)	1,960			(2,644		)
Net income recorded, for covered loans including those accounted for under ASC 310-20 and ASC 310-40	(1,189		)	(1,968		)	(5,604		)	(6,685		)
Net (increase) decrease to income before taxes	$	(1,125	)	$	(3,473	)	$	(3,644	)	$	(9,329	)

(1) The results of re-estimations also included cash flow improvements to be recognized prospectively as an adjustment to the accretable yield on the related covered loans of $3.6 million and $17.4 million for the three months ended September 30, 2015 and 2014, respectively, and $20.4 million and $33.9 million for the nine months ended September 30, 2015 and 2014, respectively.

45

The following table summarizes the activity related to the FDIC indemnification asset and the FDIC receivable for the three and nine months ended September 30, 2015 and 2014.  For further detail on impairment and provision expense related to loans accounted for under ASC Topic 310-30, refer to Note 6, “Allowance for Loan Losses.”

	For the three months ended  September 30, 2015						For the nine months ended September 30, 2015
(Dollars in thousands)	FDIC Indemnification Asset			FDIC Receivable			FDIC Indemnification Asset			FDIC Receivable
Balance at beginning of period	$	36,997		$	5,543		$	67,026		$	6,062
Accretion	(4,366		)	—			(22,164		)	—
Sales and write-downs of other real estate owned (covered)	(17		)	(511		)	(845		)	(495		)
Net effect of change in allowance on covered assets (1)	(1,095		)	—			(2,295		)	—
Reimbursements requested from FDIC (reclassification to FDIC receivable)	(968		)	968			(11,171		)	11,171
Decreases due to recoveries net of additional claimable expenses incurred (2)	—			(2,794		)	—			(10,412		)
Claim payments received from the FDIC	—			(588		)	—			(3,708		)
Balance at end of period	$	30,551		$	2,618		$	30,551		$	2,618

(1) Primarily includes adjustments for fully claimed and exited loans and the results of remeasurement of expected cash flows under ASC 310-30 accounting.

(2) Includes expenses associated with maintaining the underlying properties and legal fees.

	For the three months ended  September 30, 2014						For the nine months ended September 30, 2014
(Dollars in thousands)	FDIC Indemnification Asset			FDIC Receivable			FDIC Indemnification Asset			FDIC Receivable
Balance at beginning of period	$	102,694		$	7,198		$	131,861		$	7,783
Accretion	(6,663		)	—			(18,887		)	—
Sales and write-downs of other real estate owned (covered)	(88		)	233			(841		)	(14		)
Net effect of change in allowance on covered assets (1)	(5,484		)	—			(13,639		)	—
Reimbursements requested from FDIC (reclassification to FDIC receivable)	(8,018		)	8,018			(16,053		)	16,053
Decreases due to recoveries net of additional claimable expenses incurred (2)	—			(269		)	—			(4,588		)
Claim payments received from the FDIC	—			(2,307		)	—			(6,361		)
Balance at end of period	$	82,441		$	12,873		$	82,441		$	12,873

(1) Primarily includes adjustments for fully claimed and exited loans and the results of remeasurement of expected cash flows under ASC 310-30 accounting.

(2) Includes expenses associated with maintaining the underlying properties and legal fees.

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8. OTHER REAL ESTATE OWNED AND REPOSSESSED ASSETS

Changes in other real estate owned and repossessed assets were as follows:

	Other real estate owned
(Dollars in thousands)	Uncovered			Covered			Total other real estate owned			Repossessed assets
Balance at January 1, 2015	$	28,247		$	10,661		$	38,908		$	9,835
Additions due to acquisitions	1,260			—			1,260			—
Additions due to the adoption of ASU 2014-04 (1)	455			85			540			—
Transfers in (2)	15,205			6,985			22,190			1,671
Transfer from covered to uncovered (3)	2,249			(2,249		)	—			—
Capitalized expenditures	—			—			—			3,701
Payments received	—			—			—			(3,989		)
Disposals	(23,486		)	(9,069		)	(32,555		)	(725		)
Write-downs	(1,837		)	(790		)	(2,627		)	(786		)
Change in valuation allowance	—			—			—			(3,870		)
Balance at September 30, 2015	$	22,093		$	5,623		$	27,716		$	5,837
Balance at January 1, 2014	$	18,384		$	11,571		$	29,955		$	27
Additions due to acquisitions	30,878			—			30,878			—
Transfers in (2)	10,889			7,989			18,878			357
Disposals	(24,116		)	(6,189		)	(30,305		)	(292		)
Write-downs	(2,861		)	(1,605		)	(4,466		)	—
Balance at September 30, 2014	$	33,174		$	11,766		$	44,940		$	92

(1) The Company adopted the provisions of FASB ASU No. 2014-04, “Reclassification of Residential Real Estate Collaterized Consumer Mortgage Loans Upon Foreclosure” (“ASU 2014-04”) utilizing the prospective transition method.

(2) Includes loans transferred to other real estate owned and other repossessed assets and transfers to other real estate owned due to branch or building operation closings/consolidations.

(3) Effective July 1, 2015, the first of our four non-single family FDIC loss share agreements expired, therefore the balance of the other real estate owned was reclassified to uncovered.

At September 30, 2015, the Company had $684 thousand of other real estate owned and repossessed assets as a

result of obtaining physical possession in accordance with ASU 2014-04. In addition, there are $9.6 million of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process, as of September 30, 2015.

Activity in the valuation allowance for repossessed assets during the three and nine months ended September 30, 2015 is summarized below.  There was no valuation allowance for repossessed assets at any time during the three or nine months ended September 30, 2014.

(Dollars in thousands)	Valuation allowance for repossessed assets
For the three months ended September 30, 2015
Beginning balance	$	3,062
Provision for valuation allowance	1,268
Ending Balance	$	4,330
For the nine months ended September 30, 2015
Beginning balance	$	460
Provision for valuation allowance	3,870
Ending Balance	$	4,330

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Income and expenses related to other real estate owned and repossessed assets, recorded as a component of “Other expense” in the Consolidated Statements of Income, were as follows:

	Other real estate owned
(Dollars in thousands)	Uncovered			Covered			Total other real estate owned			Repossessed assets
For the three months ended September 30, 2015
Net gain (loss) on sale	$	2,949		$	55		$	3,004		$	(53	)
Write-downs	(526		)	(154		)	(680		)	(318		)
Provision for valuation allowance	—			—			—			(1,268		)
Net operating expenses	(665		)	(67		)	(732		)	(169		)
Total	$	1,758		$	(166	)	$	1,592		$	(1,808	)
For the nine months ended September 30, 2015
Net gain (loss) on sale	$	6,122		$	(298	)	$	5,824		$	(93	)
Write-downs	(1,837		)	(790		)	(2,627		)	(786		)
Provision for valuation allowance	—			—			—			(3,870		)
Net operating expenses	(1,555		)	(185		)	(1,740		)	(232		)
Total	$	2,730		$	(1,273	)	$	1,457		$	(4,981	)
For the three months ended September 30, 2014
Net gain (loss) on sale	$	2,364		$	63		$	2,427		$	(4	)
Write-downs	(1,361		)	(701		)	(2,062		)	—
Net operating expenses	(778		)	(60		)	(838		)	(28		)
Total	$	225		$	(698	)	$	(473	)	$	(32	)
For the nine months ended September 30, 2014
Net gain (loss) on sale	$	6,366		$	294		$	6,660		$	(8	)
Write-downs	(2,861		)	(1,605		)	(4,466		)	—
Net operating expenses	(2,323		)	(133		)	(2,456		)	(77		)
Total	$	1,182		$	(1,444	)	$	(262	)	$	(85	)

Note that covered expenses and income are partially offset by the corresponding recording of FDIC loss share income or expense.

9.  INTANGIBLE ASSETS

Core Deposit Intangibles

The Company recorded core deposit intangibles (CDIs) associated with each of its acquisitions. CDIs are amortized on an accelerated basis over their estimated useful lives and have an estimated remaining weighted-average useful life of 6.9 years as of September 30, 2015.

The table below presents the Company’s net carrying amount of CDIs.

(Dollars in thousands)	September 30, 2015			December 31, 2014
Gross carrying amount	$	23,068		$	20,658
Accumulated amortization	(9,598		)	(7,623		)
Net carrying amount	$	13,470		$	13,035

Amortization expense recognized on CDIs was $662 thousand and $680 thousand for the three months ended September 30, 2015 and 2014, respectively, and $2.0 million and $2.1 million for the nine months ended September 30, 2015 and 2014, respectively, included as a component of “other expense” in the Consolidated Statements of Income.

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Goodwill

The Company recorded goodwill in the amount of $3.5 million associated with the acquisition of First of Huron Corporation completed February 6, 2015. Goodwill is deemed to have an indefinite life and is not amortized but instead is subject to an annual review for impairment.

10.  LOAN SERVICING RIGHTS

Loan servicing rights are created as a result of the Company’s mortgage banking origination activities, the purchase of mortgage servicing rights, the origination and purchase of commercial real estate servicing rights and the origination and purchase of agricultural servicing rights.  Loans serviced for others are not reported as assets in the Consolidated Balance Sheets.

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The following table represents the activity for loan servicing rights and the related fair value changes.

(Dollars in thousands)	Commercial Real Estate			Agricultural			Mortgage			Total
For the three months ended September 30, 2015
Fair value, beginning of period	$	580		$	—		$	58,314		$	58,894
Additions from loans sold with servicing retained	—			—			2,759			2,759
Changes in fair value due to:
Reductions from loans paid off during the period	(44		)	—			(1,992		)	(2,036		)
Changes due to valuation inputs or assumptions (1)	(27		)	—			(3,804		)	(3,831		)
Fair value, end of period	$	509		$	—		$	55,277		$	55,786
For the nine months ended September 30, 2015
Fair value, beginning of period	$	691		$	—		$	69,907		$	70,598
Additions from loans sold with servicing retained	—			—			8,607			8,607
Reduction from loans sold and servicing rights sold (2)	—			—			(12,702		)	(12,702		)
Changes in fair value due to:
Reductions from loans paid off during the period	(97		)	—			(5,851		)	(5,948		)
Changes due to valuation inputs or assumptions (1)	(85		)	—			(4,684		)	(4,769		)
Fair value, end of period	$	509		$	—		$	55,277		$	55,786
Principal balance of loans serviced	$	182,450		$	—		$	5,835,058		$	6,017,508
For the three months ended September 30, 2014
Fair value, beginning of period	$	837		$	876		$	72,391		$	74,104
Additions from loans sold with servicing retained	—			2			2,296			2,298
Changes in fair value due to:
Reductions from loans paid off during the period	(57		)	(83		)	(1,706		)	(1,846		)
Changes due to valuation inputs or assumptions (1)	(18		)	(24		)	(134		)	(176		)
Fair value, end of period	$	762		$	771		$	72,847		$	74,380
For the nine months ended September 30, 2014
Fair value, beginning of period	$	368		$	962		$	77,273		$	78,603
Additions due to acquisition	767			—			—			767
Additions from loans sold with servicing retained	—			125			5,921			6,046
Changes in fair value due to:
Reductions from loans paid off during the period	(125		)	(220		)	(4,110		)	(4,455		)
Changes due to valuation inputs or assumptions (1)	(248		)	(96		)	(6,237		)	(6,581		)
Fair value, end of period	$	762		$	771		$	72,847		$	74,380
Principal balance of loans serviced	$	222,262		$	37,301		$	7,069,937		$	7,329,500

(1) Represents estimated fair value changes primarily due to prepayment speeds and market-driven changes in interest rates.

(2) $12.7 million of servicing rights were sold during the nine months ended September 30, 2015 in connection with the sale of $1.2 billion of principal balance of loans serviced.

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Expected and actual loan prepayment speeds are the most significant factors driving the fair value of loan servicing rights. The following table presents assumptions utilized in determining the fair value of loan servicing rights as of September 30, 2015 and December 31, 2014.

	Commercial Real Estate			Mortgage
As of September 30, 2015
Prepayment speed	6.68 - 50.00%			3.62 - 41.76%
Weighted average (“WA”) discount rate	19.54		%	9.16		%
WA cost to service/per year	$	470		$	61
WA ancillary income/per year	N/A			35
WA float range	0.56		%	1.18 - 1.68%
As of December 31, 2014
Prepayment speed	6.41 - 50.00%			3.63 - 40.07%
WA discount rate	19.48		%	9.14		%
WA cost to service/per year	$	470		$	61
WA ancillary income/per year	N/A			35
WA float range	0.56		%	1.16 - 1.74%

The Company realized total loan servicing fee income of $2.6 million and $3.1 million for the three months ended September 30, 2015 and 2014, respectively, and $7.7 million and $10.4 million for the nine months ended September 30, 2015 and 2014, respectively, recorded as a component of “Mortgage banking and other loan fees” in the Consolidated Statements of Income.

11.  DERIVATIVE INSTRUMENTS AND BALANCE SHEET OFFSETTING

In the normal course of business, the Company enters into various transactions involving derivative instruments to manage exposure to fluctuations in interest rates and to meet the financing needs of customers (customer-initiated derivatives).  These financial instruments involve, to varying degrees, elements of market and credit risk.  Market and credit risk are included in the determination of fair value.

Commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company’s practice to enter into forward commitments for the future delivery of mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans.

The Company enters into interest rate derivatives to provide a service to certain qualifying customers to help facilitate their respective risk management strategies, customer-initiated derivatives, and, therefore, are not used for interest rate risk management purposes. The Company generally takes offsetting positions with dealer counterparts to mitigate the inherent risk.  Income primarily results from the spread between the customer derivative and the offsetting dealer positions.

The Company additionally utilizes interest rate swaps designated as cash flow hedges for risk management purposes to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  These interest rate swaps designated as cash flow hedges are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to certain variable rate borrowings and/or deposits.  The Company assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative instrument with the changes in cash flows of the designated hedged transactions.  The interest rate swaps designated as cash flow hedges were determined to be fully effective during all periods presented.  As such, no amount of ineffectiveness has been included in net income.  Therefore, the aggregate fair value of the swaps is recorded in other assets (liabilities) with changes in fair value recorded in other comprehensive income (loss).  The amount included in accumulated other comprehensive income (loss) would be reclassified to current earnings should the hedge no longer be considered effective.  The Company expects the hedges to remain fully effective and does not expect any amounts to be reclassified from accumulated other comprehensive income due to ineffectiveness during the remaining terms of the swaps.

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The following table presents the notional amount and fair value of the Company’s derivative instruments held or issued for risk management purposes or in connection with customer-initiated and mortgage banking activities.

	September 30, 2015						December 31, 2014
			Fair Value						Fair Value
(Dollars in thousands)	Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)		Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)
Risk management purposes:
Derivatives designated as hedging instruments:
Interest rate swaps	$	22,000	$	—	$	586	$	12,000	$	—	$	222
Total risk management purposes	22,000		—		586		12,000		—		222
Customer-initiated and mortgage banking activities:
Forward contracts related to mortgage loans to be delivered for sale	165,899		—		1,082		114,828		—		803
Interest rate lock commitments	112,057		2,740		—		67,817		1,489		—
Customer-initiated derivatives	317,773		5,650		5,684		125,356		1,588		1,477
Total customer-initiated and mortgage banking activities	595,729		8,390		6,766		308,001		3,077		2,280
Total gross derivatives	$	617,729	$	8,390	$	7,352	$	320,001	$	3,077	$	2,502

(1) Notional or contract amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement.  These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in the Consolidated Balance Sheets.

(2) Derivative assets are included within “Other assets”  and derivative liabilities are included within “Other liabilities” on the Consolidated Balance Sheets.  Included in the fair value of the derivative assets are credit valuation adjustments for counterparty credit risk totaling $260 thousand at September 30, 2015 and $103 thousand at December 31, 2014.

In the normal course of business, the Company may decide to settle a forward contract rather than fulfill the contract.  Cash received or paid in this settlement manner is included in “Net gain on sales of loans” in the Consolidated Statements of Income and is considered a cost of executing a forward contract.

The following table presents the net gains (losses) related to derivative instruments reflecting the changes in fair value.

		For the three months ended September 30,						For the the nine months ended September 30,
(Dollars in thousands)	Location of Gain (Loss)	2015			2014			2015			2014
Forward contracts related to mortgage loans to be delivered for sale	Net gain on sale of loans	$	(3,128	)	$	(463	)	$	(1,917	)	$	(10,372	)
Interest rate lock commitments	Net gain on sale of loans	711			(853		)	1,253			284
Customer-initiated derivatives	Other noninterest income	194			4			156			23
Total loss recognized in income		$	(2,223	)	$	(1,312	)	$	(508	)	$	(10,065	)

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The following table presents the net gains (losses) recorded in accumulated other comprehensive income and the Consolidated Statements of Income relating to interest rate swaps designated as cash flow hedges for the three and nine months ended September 30, 2015.  We had no interest rate swaps designated as cash flow hedges in the three and nine months ended September 30, 2014.

(Dollars in thousands)	Amount of gain (loss) recognized in other comprehensive income (Effective portion)			Amount of gain (loss) reclassified from other comprehensive income to interest income or expense (Effective portion)			Amount of gain (loss) recognized in other non interest income (Ineffective portion)
For the three months ended September 30, 2015
Interest rate swaps designated as cash flow hedges	$	(893	)	$	(104	)	$	—
For the nine months ended September 30, 2015
Interest rate swaps designated as cash flow hedges	$	(660	)	$	(296	)	$	—

At September 30, 2015, the Company expected $366 thousand of unrealized losses to be reclassified as an increase to interest expense during the following 12 months.

Methods and assumptions used by the Company in estimating the fair value of its forward contracts, interest rate lock commitments, customer-initiated derivatives and interest rate swaps designated as cash flow hedges are discussed in Note 3, “Fair Value”.

Balance Sheet Offsetting

Certain financial instruments, including derivatives (interest rate swaps designated as cash flow hedges and customer-initiated derivatives), may be eligible for offset in the Consolidated Balance Sheet and/or subject to master netting arrangements or similar agreements.  The Company is party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes.  The tables below present information about the Company’s financial instruments that are eligible for offset.

							Gross amounts not offset in the statement of financial position
(Dollars in thousands)	Gross amounts recognized		Gross amounts offset in the statement of financial condition		Net amounts presented in the statement of financial position		Financial instruments			Collateral (received)/posted		Net Amount
September 30, 2015
Offsetting derivative assets
Derivative assets	$	5,650	$	—	$	5,650	$	(5,650	)	$	5,140	$	5,140
Offsetting derivative liabilities
Derivative liabilities	6,270		—		6,270		(5,650		)	620		—
December 31, 2014
Offsetting derivative assets
Derivative assets	$	1,588	$	—	$	1,588	$	(1,588	)	$	1,689	$	1,689
Offsetting derivative liabilities
Derivative liabilities	1,699		—		1,699		(1,588		)	111		—

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12.  COMMITMENTS, CONTINGENCIES AND GUARANTEES

Commitments

In the normal course of business, the Company offers a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include outstanding commitments to extend credit, credit lines, commercial letters of credit and standby letters of credit.

The Company’s exposure to credit loss, in the event of nonperformance by the counterparty to the financial instrument, is represented by the contractual amounts of those instruments. The credit policies used in making commitments and conditional obligations are the same as those used for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. The collateral held varies, but may include securities, real estate, accounts receivable, inventory, plant, or equipment. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are included in commitments to extend credit. These lines of credit are generally uncollateralized, usually do not contain a specified maturity date and may be drawn upon only to the total extent to which the Company is committed.

Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to the Company arises from its obligation to make payment in the event of the customers’ contractual default to produce the contracted good or service to a third party.

The allowance for credit losses on lending-related commitments included $815 thousand and $539 thousand at September 30, 2015 and December 31, 2014, respectively, for probable credit losses inherent in the Company’s unused commitments and was recorded in “Other liabilities” in the Consolidated Balance Sheets.

A summary of the contractual amounts of the Company’s exposure to off-balance sheet risk is as follows:

	September 30, 2015						December 31, 2014
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Commitments to extend credit	$	578,956	$	625,114	$	1,204,070	$	502,762	$	463,362	$	966,124
Standby letters of credit	63,979		3,526		67,505		69,305		4,197		73,502
Total commitments	$	642,935	$	628,640	$	1,271,575	$	572,067	$	467,559	$	1,039,626

Contingencies and Guarantees

The Company has originated and sold certain loans for which the buyer has limited recourse to us in the event the loans do not perform as specified in the agreements.  These loans had an outstanding balance of $24.6 million and $39.8 million at September 30, 2015 and December 31, 2014, respectively. The maximum potential amount of undiscounted future payments that we could be required to make in the event of nonperformance by the borrower totaled $18.8 million and $31.6 million at September 30, 2015 and December 31, 2014, respectively.  In the event of nonperformance, we have rights to the underlying collateral securing the loans.  As of September 30, 2015 and December 31, 2014, we had recorded a liability of $170 thousand and $355 thousand, respectively, in connection with the recourse agreements, recorded in “Other liabilities” in the Consolidated Balance Sheets.

We issue standby letters of credit for commercial customers to third parties to guarantee the performance of those customers to the third parties.  If the customer fails to perform, we perform in their place and record the funds advanced as an interest-bearing loan.  These letters of credit are underwritten using the same policies and criteria applied to commercial loans.  Therefore, they represent the same risk to us as a loan to that commercial loan customer.  At September 30, 2015 and December 31, 2014, our standby letters of credit totaled $67.5 million and $73.5 million, respectively.

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Representations and Warranties

In connection with our mortgage banking loan sales, we make certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards.  We may be required to repurchase individual loans and/or indemnify the purchaser against losses if the loan fails to meet established criteria. At September 30, 2015 and December 31, 2014, our liability recorded in connection with these representations and warranties totaled $1.8 million and $4.0 million, respectively.

Legal Proceedings

The Company and certain of its subsidiaries are subject to various pending or threatened legal proceedings arising out of the normal course of business. Some of these claims are against entities or assets of which the Company has acquired in business acquisitions, and certain of these claims, or future claims, will be covered by loss sharing agreements with the FDIC.

The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings utilizing the latest information available. Where it is probable that the Company will incur a loss and the amount of

the loss can be reasonably estimated, the Company records a liability in its consolidated financial statements. While the ultimate liability with respect to these litigation matters and claims cannot be determined at this time, in the opinion of management, any liabilities arising from pending legal proceedings would not have a material adverse effect on the Company’s financial statements.

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13.  SHORT-TERM BORROWINGS AND LONG-TERM DEBT

The following table presents the components of the Company’s short-term borrowings and long-term debt.

	September 30, 2015				December 31, 2014
(Dollars in thousands)	Amount		Weighted Average Rate (1)		Amount		Weighted Average Rate (1)
Short-term borrowings:
Securities sold under agreements to repurchase: 0.05% - 0.10% variable-rate notes	$	22,090	0.10	%	$	25,743	0.10	%
FHLB advances: fixed-rate notes	50,000		0.37		100,000		0.29
FHLB advances: 0.43% variable-rate notes	—		—		10,000		0.43
Holding company line of credit: floating-rate based on one-month LIBOR plus 3.00%	30,000		3.20		—		—
Total short-term borrowings	102,090		1.14		135,743		0.26
Long-term debt:
FHLB advances: 0.26% - 7.44% fixed-rate notes due 2015 to 2027 (2)	414,405		1.25		286,804		1.57
Securities sold under agreements to repurchase: 4.11% - 4.30% fixed-rate notes due 2016 to 2037 (3)	55,212		4.19		56,444		4.19
Subordinated notes related to trust preferred securities: floating-rate based on three-month LIBOR plus 1.45% - 2.85% due 2034 to 2035 (4)	10,829		2.56		10,724		2.48
Subordinated notes related to trust preferred securities: floating-rate based on three-month LIBOR plus 3.25% due in 2032 (5)	4,535		3.53		—		—
Total long-term debt	484,981		1.64		353,972		2.02
Total short-term borrowings and long-term debt	$	587,071	1.55	%	$	489,715	1.53	%

(1) Weighted average rate presented is the contractual rate which excludes premiums and discounts related to purchase accounting.

(2) The September 30, 2015 balance includes advances payable of $409.5 million and purchase accounting premiums of $4.9 million. The December 31, 2014 balance includes advances payable of $280.1 million and purchase accounting premiums of $6.7 million.

(3) The September 30, 2015 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $5.2 million. The December 31, 2014 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $6.4 million.

(4) The September 30, 2015 balance includes subordinated notes related to trust preferred securities of $15.0 million and purchase accounting discounts of $4.2 million.  The December 31, 2014 balance includes subordinated notes related to trust preferred securities of $15.0 million and purchase accounting discounts of $4.3 million.

(5) The September 30, 2015 balance includes subordinated notes related to trust preferred securities of $5.0 million and purchase accounting discounts of $465 thousand.

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Selected financial information pertaining to the components of our short-term borrowings is as follows:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Securities sold under agreement to repurchase:
Average daily balance	$	25,249		$	136,707		$	21,710		$	97,156
Average interest rate during the period	0.10		%	0.14		%	0.10		%	0.12		%
Maximum month-end balance	$	26,703		$	166,925		$	26,703		$	166,925
FHLB advances:
Average daily balance	$	164,414		$	82,935		$	71,099		$	40,966
Average interest rate during the period	0.36		%	0.19		%	0.29		%	0.80		%
Maximum month-end balance	$	200,000		$	70,000		$	200,000		$	90,000
Federal funds purchased:
Average daily balance	$	—		$	217		$	462		$	1,568
Average interest rate during the period	—		%	0.31		%	0.31		%	0.27		%
Maximum month-end balance	$	—		$	—		$	126,000		$	—
FHLB overnight repurchase agreements:
Average daily balance	$	—		$	—		$	—		$	2,931
Average interest rate during the period	—		%	—		%	—		%	0.10		%
Maximum month-end balance	$	—		$	—		$	—		$	—
Holding company line of credit:
Average daily balance	$	30,000		$	—		$	20,897		$	7,436
Average interest rate during the period	3.19		%	—		%	3.18		%	—		%
Maximum month-end balance	$	30,000		$	—		$	30,000		$	35,000

Securities sold under agreements to repurchase represent funds deposited with the banks by retail customers (short-term borrowings), of which up to $250 thousand is covered by FDIC insurance for each depositor.  Securities sold under agreements to repurchase are typically delivered to the counterparty when they are wholesale borrowings with brokerage firms (long-term debt). At maturity, the securities underlying the agreements are returned to the banks.  Securities sold under agreements to repurchase are additionally collateralized by residential mortgage-backed securities issued and/or guaranteed by U.S. government agencies or U.S. government sponsored enterprises with a carrying value of $86.0 million at September 30, 2015 which are not covered by FDIC insurance. The Company's securities sold under agreements to repurchase do not qualify as sales for accounting purposes.

Our subsidiary bank is a member of the FHLB, which provides short- and long-term funding collateralized by mortgage-related assets to its members.  Each advance is payable at its maturity date, with a prepayment penalty for fixed-rate advances.  At September 30, 2015, FHLB advances were collateralized by $1.7 billion of commercial and mortgage loans, with $1.1 billion in the form of a blanket lien arrangement and $545.8 million under specific lien arrangements.  Based on this collateral, the Company is eligible to borrow up to an additional $623.2 million at September 30, 2015; however, due to Board resolutions, this amount is limited to an additional $394.3 million.

 In the nine months ended September 30, 2015, we drew $20.0 million in order to facilitate our repurchase of 2.5 million warrants to purchase shares of our Class A common stock of an aggregate purchase price of $19.9 million and $10.0 million for working capital on our existing line of credit.

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14. INCOME TAXES

Provision for income taxes is computed by applying an estimated annual effective tax rate, based on our forecast of annual income from continuing operations, and then adjusting for any additional tax effects required to be recorded discreetly in the quarter to which they relate.

A reconciliation of expected income tax expense at the federal statutory rate to the Company’s provision for income taxes and effective tax rate follows.

	For the three months ended September 30,										For the nine months ended September 30,
	2015					2014					2015					2014
(Dollars in thousands)	Amount			Rate		Amount			Rate		Amount			Rate		Amount			Rate
Tax based on federal statutory rate	$	9,261		35.0	%	$	10,297		35.0	%	$	23,121		35.0	%	$	28,823		35.0	%
Effect of:
Tax exempt income	(719		)	(2.7	)	(521		)	(1.8	)	(1,994		)	(3.0	)	(1,723		)	(2.1	)
State taxes, net of federal benefit	329			1.2		666			2.3		789			1.2		1,135			1.4
Change in valuation allowance	2,804			10.6		—			—		2,804			4.2		(10,127		)	(12.3	)
Bargain purchase gain	—			—		—			—		—			—		(14,692		)	(17.8	)
Transaction costs	—			—		—			—		47			0.1		454			0.5
Deferred tax benefit	(4,991		)	(18.9	)	—			—		(4,991		)	(7.6	)	—			—
Other, net	(259		)	(0.9	)	(538		)	(1.8	)	(731		)	(1.1	)	132			0.2
Income tax expense	$	6,425		24.3	%	$	9,904		33.7	%	$	19,045		28.8	%	$	4,002		4.9	%

During the period ended September 30, 2015, the Capital Bancorp, Ltd.'s consolidated tax return (Talmer West Bank's former parent holding company) for the year ended December 31, 2014 was completed. The resulting impact was an allocation of net operating loss to Talmer West Bank that exceeded expectations, thereby generating an additional tax benefit of $5.0 million of net operating loss carry forwards. Management concluded that a valuation allowance in the amount of $2.8 million was necessary based on estimates of future recognized built in losses.

15.  STOCK-BASED COMPENSATION

The Company’s 2009 Equity Incentive Plan (the “Plan”), along with amendments made to the Plan, limits the number of shares issued or issuable to employees, directors and certain consultants at 9.8 million shares of common stock.  As of September 30, 2015, 1.3 million shares were available to be awarded under the Plan.

Stock Options

Options are granted with an exercise price equal to or greater than the fair market price of the Company’s common stock at the date of grant.  The vesting and terms of option awards are determined by the Company’s Compensation Committee of the Board of Directors.  For the nine months ended September 30, 2015, there were no stock options granted. During the nine months ended September 30, 2014, the Company granted 35 thousand stock options that were fully vested upon issuance and will remain outstanding for 10 years after the grant date.

The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model that uses the assumptions noted in the table below. Given the relatively short history of Company stock being publicly traded during the nine months ended September 30, 2014, post our public offering in February of 2014, it was not practicable for the Company to estimate volatility of its share price. For the nine months ended September 30, 2014 the Company used the average volatility of comparable public Bank holding companies as an input to the valuation model. Since limited historical data is available, the expected term of options granted was estimated to be six years for the nine months ended September 30, 2014 based on expected lives used by a sample of other Midwest banks. The risk-free interest rate was based on the U.S. Treasury yield curve in effect at the time of the grant corresponding with the expected life of the options. The expected dividend yield is based on historical and projected dividend patterns of the Company’s common shares. At the time the shares were granted in 2014 there were not any expected dividends projected. All shares granted are expected to vest and the Company intends to issue already authorized shares to satisfy options upon exercise.

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The fair value of options granted during the nine months ended September 30, 2014 was determined using the following weighted-average assumptions as of the grant date.

	For the nine months ended
	September 30, 2014
Fair value of options granted	$	4.77
Expected dividend yield	—		%
Expected volatility	30.02		%
Risk-free interest rate	1.98		%
Expected life (in years)	6.00

Activity in the Plan during the nine months ended September 30, 2015 is summarized below:

			Weighted average
	Number of shares (in thousands)		Exercise price per share		Remaining contractual life (in years)	Aggregate intrinsic value (in thousands)
Outstanding at January 1, 2015	7,958		$	6.96
Exercised (1)	(723	)	6.85
Outstanding at September 30, 2015	7,235		6.97		5.96	70,039
Options fully vested	7,235		6.97		5.96	70,039
Exercisable at September 30, 2015	7,235		6.97		5.96	70,039

(1) Options exercised during the nine months ended September 30, 2015 had a weighted average fair value of $15.89, at respective exercise dates.

The total intrinsic value of stock options exercised was $6.5 million for the nine months ended September 30, 2015.

Total cash received from option exercises during the nine months ended September 30, 2015 was $210 thousand, resulting in the issuance of 35 thousand shares.  During the nine months ended September 30, 2015, there were 258 thousand shares issued under the net-settlement option.  The tax benefit realized from option exercises during the nine months ended September 30, 2015 was $1.8 million.

All of the Company’s shares were fully vested prior to January 1, 2015 and there was no unrecognized compensation cost related to nonvested stock options granted under the Plan.  Total compensation expense for stock options, included in “Salary and employee benefits” in the Consolidated Statements of Income, was $42 thousand and $429 thousand for the three and nine months ended September 30, 2014, respectively.

Restricted Stock Awards

Under the Plan, the Company can grant restricted stock awards that vest upon completion of future service requirements or specified performance criteria.  The fair value of these awards is equal to the market price of the common stock at the date of grant.  The Company recognizes stock-based compensation expense for these awards over the vesting period, using the straight-line method, based upon the number of shares of restricted stock ultimately expected to vest.  Restricted stock awards granted vest in their entirety following a five-year service period for employees and over a one-year service period for directors.  Restricted stock awards granted to directors during the nine months ended September 30, 2015 additionally contain performance-based vesting conditions. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  If an individual awarded restricted stock awards terminates employment prior to the end of the vesting period, the unvested portion of the stock award is forfeited.

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The following table provides information regarding nonvested restricted stock awards:

Nonvested restricted stock awards	Shares (in thousands)		Weighted-average grant-date fair value
Nonvested at January 1, 2015	378		$	14.44
Granted	391		15.10
Vested	(19	)	14.44
Forfeited	(11	)	14.95
Nonvested at September 30, 2015	739		$	14.78

Total expense for restricted stock awards totaled $515 thousand for the three months ended September 30, 2015, of which $437 thousand was included in “Salary and employee benefits” related to employees and $78 thousand was included in “Professional fees” related to directors in the Consolidated Statements of Income.  For the nine months ended September 30, 2015, total expense for restricted stock awards totaled $1.4 million, of which $1.2 million was included in "Salary and employee benefits" related to employees and $205 thousand was included in "Professional fees" related to directors in the Consolidated Statements of Income. For the three months ended September 30, 2014, total expense for restricted stock awards totaled $302 thousand, of which $227 thousand was included in "Salary and employee benefits" related to employees and $75 thousand was included in "Professional fees" related to director in the Consolidated Statements of Income. For the nine months ended September 30, 2014, total expense for restricted stock awards totaled $369 thousand, of which $277 thousand was included in "Salary and employee benefits" related to employees and $92 thousand was included in "Professional fees" related to directors in the Consolidated Statements of Income. As of September 30, 2015, the total compensation costs related to nonvested restricted stock that has not yet been recognized totaled $9.2 million and the weighted-average period over which these costs are expected to be recognized is 4.1 years.

16. REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believes as of September 30, 2015, the Company and its subsidiary bank met all capital adequacy requirements to which they are subject.

Prompt corrective action regulations provide five classifications:  well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

Effective January 1, 2015 we adopted the new Basel III regulatory capital framework as approved by federal banking agencies, which are subject to a multi-year phase-in period.  The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. In addition, Basel III establishes a new capital conservation buffer of 2.5% of risk-weighted assets, which is phased-in over a four-year period beginning January 1, 2016. We have elected to opt-out of including capital in accumulated other comprehensive income in common equity tier 1 capital.

At September 30, 2015 and December 31, 2014, the most recent regulatory notifications categorized Talmer Bank and Trust as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the institution’s category.

Consent Order

On April 5, 2010, Michigan Commerce Bank consented to the issuance of the Consent Order by the FDIC and the Michigan Department of Insurance and Financial Services.  The Consent Order was terminated following the merger of Talmer West Bank with and into Talmer Bank and Trust on August 21, 2015.

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The following is a summary of actual and required capital amounts and ratios in accordance with current regulatory standards:

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2015 (Basel III Transitional)
Total capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	$	714,836	13.2	%	$	433,301	8.0	%	N/A		N/A
Talmer Bank and Trust	734,680		13.6		432,614		8.0		$	540,768	10.0	%
Common equity tier 1 capital
Talmer Bancorp, Inc. (Consolidated)	656,214		12.1		243,732		4.5		N/A		N/A
Talmer Bank and Trust	676,058		12.5		243,345		4.5		351,499		6.5
Tier 1 capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	656,214		12.1		324,976		6.0		N/A		N/A
Talmer Bank and Trust	676,058		12.5		324,461		6.0		432,614		8.0
Tier 1 leverage ratio
Talmer Bancorp, Inc. (Consolidated)	656,214		10.2		256,989		4.0		N/A		N/A
Talmer Bank and Trust	676,058		11.3		239,862		4.0		299,827		5.0
December 31, 2014 (Basel I)
Total capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	$	720,552	16.4	%	$	350,645	8.0	%	N/A		N/A
Talmer Bank and Trust	627,851		16.3		308,374		8.0		$	385,468	10.0	%
Talmer West Bank (1)	101,926		19.6		41,628		8.0		N/A		N/A
Tier 1 capital to risk-weighted assets
Talmer Bancorp, Inc. (Consolidated)	666,035		15.2		175,323		4.0		N/A		N/A
Talmer Bank and Trust	579,604		15.0		154,187		4.0		231,281		6.0
Talmer West Bank (1)	95,656		18.4		20,814		4.0		N/A		N/A
Tier 1 leverage ratio
Talmer Bancorp, Inc. (Consolidated)	666,035		11.6		230,546		4.0		N/A		N/A
Talmer Bank and Trust	579,604		11.6		200,128		4.0		250,160		5.0
Talmer West Bank (1)	95,656		12.4		30,786		4.0		N/A		N/A

(1) Notwithstanding its capital levels, Talmer West Bank was not categorized as well capitalized while it was subject to the Consent Order. On August 21, 2015, Talmer West Bank was merged with and into Talmer Bank and Trust.

The Company’s principal source of funds for dividend payments is dividends received from its subsidiary banks. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Talmer Bank and Trust cannot declare or pay a cash dividend or dividend in kind unless Talmer Bank and Trust will have a surplus amounting to not less than 20% of its capital after payment of the dividend.  In addition, Talmer Bank and Trust may pay dividends only out of net income then on hand, after deducting its losses and bad debts.  These limitations can affect Talmer Bank and Trust’s ability to pay dividends.

During the three months ended September 30, 2015 and 2014, dividends of $80.0 million and $0, respectively, were paid to the Company by a subsidiary bank, while for the nine months ended September 30, 2015 and 2014, dividends of $95.0 million and $25.0 million, respectively, were paid to the Company by a subsidiary bank.

On October 28, 2015, a cash dividend on the Company’s Class A common stock of $0.01 per share was declared.  The dividend will be paid on November 20, 2015, to the Company’s Class A common shareholders of record as of November 9, 2015.

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17.  PARENT COMPANY FINANCIAL STATEMENTS

Balance Sheets - Parent Company

(Dollars in thousands)	September 30, 2015		December 31, 2014
Assets
Cash and cash equivalents	$	11,745	$	9,497
Investment in banking subsidiaries	738,327		756,452
Income tax benefit	9,739		7,975
Other assets	1,331		655
Total assets	$	761,142	$	774,579
Liabilities
Short-term borrowings	$	30,000	$	—
Long-term debt	15,364		10,724
Accrued expenses and other liabilities	1,010		2,248
Total liabilities	46,374		12,972
Shareholders’ equity	714,768		761,607
Total liabilities and shareholders’ equity	$	761,142	$	774,579

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Statements of Income and Comprehensive Income - Parent Company

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Income
Dividend income from subsidiary	$	80,000		$	—		$	95,000		$	25,000
Bargain purchase gain	—			—			—			41,977
Other noninterest income	34			3			43			8
Total income	80,034			3			95,043			66,985
Expenses
Salaries and employee benefits	1,602			1,040			4,494			6,995
Bank acquisition and due diligence fees	88			238			1,243			2,212
Professional service fees	740			455			1,608			1,541
Insurance expense	85			176			198			543
Marketing expense	29			31			78			222
Interest on short-term borrowings	247			—			508			151
Interest on long-term debt	184			128			528			380
Other	35			74			208			222
Total expenses	3,010			2,142			8,865			12,266
Income (loss) before income taxes and equity in undistributed net earnings of subsidiaries	77,024			(2,139		)	86,178			54,719
Income tax benefit	1,000			533			2,735			2,990
Equity in (over)/under distributed earnings of subsidiaries	(57,989		)	21,121			(41,897		)	20,639
Net income	$	20,035		$	19,515		$	47,016		$	78,348
Total comprehensive income, net of tax	$	23,601		$	19,369		$	48,968		$	88,431

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Statements of Cash Flows - Parent Company

	For the nine months ended September 30,
(Dollars in thousands)	2015			2014
Cash flows from operating activities				��
Net income	$	47,016		$	78,348
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in over (under) distributed earnings of subsidiaries	41,897			(20,639		)
Gain on acquisition	—			(41,977		)
Stock-based compensation expense	604			382
(Increase) decrease in income tax benefit	(1,381		)	11
(Increase) decrease in other assets, net	(482		)	551
Decrease in accrued expenses and other liabilities, net	(3,620		)	(3,081		)
Net cash from operating activities	84,034			13,595
Cash flows from investing activities
Cash (used in) proceeds from acquisitions	(13,323		)	(6,500		)
Capital contributions to subsidiaries	—			(99,500		)
Refund of investment	2,225			—
Net cash used in investing activities	(11,098		)	(106,000		)
Cash flows from financing activities
Issuance of common stock	—			42,075
Issuance of common stock and restricted stock awards, including tax benefit	(182		)	(963		)
Repurchase of 5.1 million common shares	(74,987		)	—
Repurchase of warrants to purchase 2.5 million shares, at fair value	(19,892		)	—
Cash dividends paid on common stock (1)	(2,127		)	(704		)
Draw on senior unsecured line of credit	30,000			—
Repayment of senior unsecured line of credit	—			(35,000		)
Repayment of long-term debt	(3,500		)	—
Net cash from financing activities	(70,688		)	5,408
Net increase (decrease) in cash and cash equivalents	2,248			(86,997		)
Beginning cash and cash equivalents	9,497			98,411
Ending cash and cash equivalents	$	11,745		$	11,414

(1) $0.03 per share and $0.01 per share for the nine months ended September 30, 2015 and 2014, respectively.

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18.  EARNINGS PER COMMON SHARE

The two-class method is used in the calculation of basic and diluted earnings per share.  Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating rights in undistributed earnings.  Common shares outstanding include common stock and vested restricted stock awards, when applicable. The factors used in the earnings per share computation follow:

	For the three months ended September 30,						For the nine months ended September 30,
(In thousands, except per share data)	2015			2014			2015			2014
Net income	$	20,035		$	19,515		$	47,016		$	78,348
Net income allocated to participating securities	207			105			407			178
Net income allocated to common shareholders (1)	$	19,828		$	19,410		$	46,609		$	78,170
Weighted average common shares - issued	69,449			70,470			70,354			69,570
Average unvested restricted share awards	(718		)	(378		)	(610		)	(156		)
Weighted average common shares outstanding - basic	68,731			70,092			69,744			69,414
Effect of dilutive securities -
Employee and director stock options	4,227			4,102			4,201			4,034
Warrants	264			1,558			502			1,500
Weighted average common shares outstanding - diluted	73,222			75,752			74,447			74,948
EPS available to common shareholders
Basic	$	0.29		$	0.28		$	0.67		$	1.13
Diluted	$	0.27		$	0.26		$	0.63		$	1.04

(1) Net income allocated to common shareholders for basic and diluted earnings per share may differ under the two-class method as a result of adding common share equivalents for options and warrants to dilutive shares outstanding, which alters the ratio used to allocate net income to common shareholders and participating securities for the purposes of calculating diluted earnings per share.

For the effect of dilutive securities, the average stock valuation is $16.58 per share and $14.08 per share for the three months ended September 30, 2015 and 2014, respectively, and the average stock valuation is $15.61 per share and assumed to be $13.52 per share for the nine months ended September 30, 2015 and 2014, respectively.

The following average shares related to outstanding options and warrants to purchase shares of common stock were not included in the computation of diluted net income available to common shareholders because they were antidilutive.  There were no outstanding antidilutive warrants or options during the three and nine months ended September 30, 2015 and no outstanding antidilutive warrants during the three and nine months ended September 30, 2014.

(Shares in thousands)	For the three months ended September 30, 2014		For the nine months ended September 30, 2014
Average outstanding options	35		14
Outstanding exercise prices:
Low end	$	14.44	$	14.44
High end	$	14.44	$	14.44

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19. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Changes in accumulated other comprehensive income (loss) by component, net of tax, were as follows:

(Dollars in thousands)	Unrealized gains (losses) on securities available-for-sale, net of tax				Unrealized gains (losses) on cash flow hedges, net of tax				Total unrealized gains (losses), net of tax
Three months ended September 30, 2015
Beginning balance	$	2,105			$	131			$	2,236
Other comprehensive income (loss) before reclassifications	4,210				(581		)		3,629
Amounts reclassified from accumulated other comprehensive income	(131		)	(1)	68			(2)	(63		)
Net current period other comprehensive income (loss)	4,079				(513		)		3,566
Ending balance	$	6,184			$	(382	)		$	5,802
Three months ended September 30, 2014
Beginning balance	$	2,233			$	—			$	2,233
Other comprehensive income before reclassifications	13				—				13
Amounts reclassified from accumulated other comprehensive income	(159		)	(1)	—				(159		)
Net current period other comprehensive loss	(146		)		—				(146		)
Ending balance	$	2,087			$	—			$	2,087
Nine months ended September 30, 2015
Beginning balance	$	3,995			$	(145	)		$	3,850
Other comprehensive income (loss) before reclassifications	2,255				(429		)		1,826
Amounts reclassified from accumulated other comprehensive income	(66		)	(1)	192			(2)	126
Net current period other comprehensive income (loss)	2,189				(237		)		1,952
Ending balance	$	6,184			$	(382	)		$	5,802
Nine months ended September 30, 2014
Beginning balance	$	(7,996	)		$	—			$	(7,996	)
Other comprehensive income before reclassifications	8,740								8,740
Amounts reclassified from accumulated other comprehensive income	1,343			(1)					1,343
Net current period other comprehensive income	10,083				—				10,083
Ending balance	$	2,087			$	—			$	2,087

(1) Amounts are included in “Net gain (loss) on sales of securities” in the Consolidated Statements of Income within total noninterest income, calculated using the specific identification method, and were net gains of $202 thousand and $244 thousand for the three months ended September 30, 2015 and 2014, respectively, and net gains of $101 thousand and net losses of $2.1 million for the nine months ended September 30, 2015 and 2014, respectively.  Income tax provision (benefit) associated with the reclassification adjustments for three months ended September 30, 2015 and 2014 was an expense of $71 thousand and $85 thousand, respectively, and for the nine months ended ended September 30, 2015 and 2014 was an expense of $35 thousand and a benefit of $723 thousand, respectively, and are included in “Income tax provision” in the Consolidated Statements of Income.

(2) Amount is included in “Other brokered funds” in the Consolidated Statements of Income within total interest expense and was $104 thousand for the three months ended September 30, 2015, and $296 thousand for the nine months ended September 30, 2015. Income tax benefit associated with the reclassification adjustment for the three months ended September 30, 2015 was $36 thousand, and for the nine months ended September 30, 2015 was $104 thousand and included in “Income tax provision” in the Consolidated Statements of Income.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion describes our results of operations for the three and nine months ended September 30, 2015 and September 30, 2014 and also analyzes our financial condition as of September 30, 2015 as compared to December 31, 2014. This discussion should be read in conjunction with our consolidated financial statements and accompanying footnotes appearing in this report and in conjunction with the financial statements and related notes and disclosures in our 2014 Annual Report on Form 10-K.

In this report, unless the context suggests otherwise, references to “Talmer Bancorp, Inc.,” “Company,” “we,” “us,” and “our” mean the combined business of Talmer Bancorp, Inc. and its subsidiary bank, Talmer Bank and Trust (“Talmer Bank”). However, if the discussion relates to a period after our acquisition of Talmer West Bank on January 1, 2014, but before Talmer West Bank was merged with and into Talmer Bank on August 21, 2015, the terms refer to Talmer Bancorp, Inc., Talmer Bank and Talmer West Bank.

We have made, and will continue to make, various forward-looking statements with respect to financial and business matters. Comments regarding our business that are not historical facts are considered forward-looking statements that involve inherent risks and uncertainties. Actual results may differ materially from those contained in these forward-looking statements. For additional information regarding our cautionary disclosures, see the “Cautionary Note Regarding Forward-Looking Statements” beginning on page 1 of this report.

Business Overview

Talmer Bancorp, Inc. is a bank holding company headquartered in Troy, Michigan.  Between April 30, 2010 and September 30, 2015, we successfully completed eight acquisitions totaling $6.0 billion in assets and $6.1 billion in liabilities.  Through our wholly-owned subsidiary bank, Talmer Bank, we are a full service community bank offering a full suite of commercial banking, retail banking, mortgage banking, wealth management and trust services to small and medium-sized businesses and individuals primarily within Southeastern Michigan, Western Michigan and in smaller communities in Northeastern Michigan, as well as Northeastern Ohio, Chicago, Illinois, Northern Indiana, and Las Vegas, Nevada.

Given our strong capital position, local market knowledge and experienced leadership team, management believes we have a competitive advantage in the markets that we serve.  We have retained a seasoned community bank management team with executive management experience in community banks located in our Midwest markets. With a well-managed, financially sound and well-capitalized Talmer Bank, management believes it has significant opportunities to expand in the current market environment through organic growth and strategic acquisitions of banking franchises in our concentrated markets of Michigan, Ohio and Indiana, as well as the Chicago Metropolitan area of Illinois.

Our product line includes loans to small and medium-sized businesses, residential mortgage loans, commercial real estate loans, residential and commercial construction and development loans, farmland and agricultural production loans, home equity loans, consumer loans and a variety of commercial and consumer demand, savings and time deposit products.  We also offer online banking and bill payment services, online cash management, safe deposit box rentals, debit card and ATM card services and the availability of a network of ATMs for our customers.

We have grown substantially since our operations began in August of 2007 through a combination of organic growth and acquisitions.  Since April 30, 2010, Talmer Bank has acquired the following four banks from the FDIC, as receiver, all of which have been fully integrated into our operations:

•CF Bancorp, Port Huron, Michigan on April 30, 2010;

•First Banking Center, Burlington, Wisconsin on November 19, 2010;

•Peoples State Bank, Hamtramck, Michigan on February 11, 2011; and

•Community Central Bank, Mount Clemens, Michigan on April 29, 2011.

On December 15, 2011, we closed on the acquisition of Lake Shore Wisconsin Corporation, which divested its subsidiary, Hiawatha National Bank, to its shareholders prior to closing.  Lake Shore Wisconsin Corporation’s

remaining assets consisted of approximately $26.0 million in cash and cash equivalents, which we acquired in the transaction.

On January 1, 2013, we closed on the acquisition of First Place Bank acquiring $2.6 billion in assets at fair value, including $1.5 billion in loans, net of unearned income, $139.8 million in investment securities, $42.0 million in loan servicing rights, and $18.4 million of other real estate owned. We also acquired $2.5 billion of liabilities at fair value, including $2.1

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billion of retail deposits with a core deposit intangible of $9.8 million, and $334.8 million of debt.  First Place Bank was merged into Talmer Bank on February 10, 2014.

On January 1, 2014, we closed on the acquisition of Talmer West Bank, formerly Michigan Commerce Bank, acquiring $910.3 million in assets at a fair value, including $571.7 million in loans, net of unearned income, $13.6 million in investment securities, $30.9 million in other real estate owned and $767 thousand in loan servicing rights. We also acquired $861.8 million of liabilities at fair value, including $857.8 million of retail deposits with a core deposit intangible of $3.6 million.  Talmer West Bank was merged into Talmer Bank August 21, 2015.

On February 6, 2015, we closed on the acquisition of First of Huron Corp. acquiring $228.3 million in assets at fair value, including $162.3 million in loans, net of unearned income and $34.0 million in investment securities.  We also acquired $218.4 million of liabilities at fair value, including $201.5 million of retail deposits and $13.1 million of debt.

As of September 30, 2015, we had $4.7 billion in total loans, compared to $4.2 billion at December 31, 2014.  Approximately 67% of our total loans at September 30, 2015 were generated through non-acquisition growth, primarily as a result of the various commercial and residential lenders that we hired over the past five years.  Of the $4.7 billion in total loans at September 30, 2015, $1.5 billion, or 32.9%, consisted of loans we acquired in transactions discussed above (all of which were adjusted to their estimated fair values at the time of acquisition).

We had net income of $47.0 million for nine months ended September 30, 2015, compared to $78.3 million for the nine months ended September 30, 2014.  During the nine months ended September 30, 2015 we incurred $3.9 million of transaction and integration related expenses including severance expense, data processing fees, professional service fees and bank acquisition and due diligence fees primarily related to our successful acquisition of First of Huron Corp.  Net income for the nine months ended September 30, 2014, included a bargain purchase gain of $42.0 million resulting from our acquisition of Talmer West Bank, $14.4 million of net gain on sale of branches and $13.3 million of transaction and integration related expenses.  While we continue to explore additional acquisition opportunities, there is no certainty that bargain purchase gains of any amount will be recognized as a result of any future closed transactions.  We completed the operational integrations of both Talmer West Bank and First of Huron Corp. in February of 2015 and the charter consolidation of Talmer West Bank into Talmer Bank in August of 2015 .  We continue to centralize the back-office functions of our acquired banks, as well as realize cost savings through the use of third party vendors and technology, in order to take advantage of economies of scale as we continue to grow.  We place our focus on initiatives that we believe will provide opportunities to enhance earnings, including the continued rationalization of our retail banking footprint through the evaluation of possible branch consolidations or opportunities to sell branches.

As of September 30, 2015, our total assets were $6.5 billion, our net total loans were $4.6 billion, our total deposits were $5.1 billion and our total shareholder’s equity was $714.8 million.

In this report, we refer to our eight completed acquisitions collectively as the “acquisitions.” In addition, we refer to loans subject to loss share agreements with the FDIC as “covered loans” and loans that are not subject to loss share agreements with the FDIC as “uncovered loans.” All of the loans and other real estate covered under the loss share agreements with the FDIC are referred to as “covered assets.” We refer to our loans acquired in our acquisitions as “acquired loans,” regardless of whether they are covered under loss share agreements with the FDIC.

Economic Overview

Growth in Gross Domestic Product (“GDP”) in the second quarter of 2015 increased at an annualized rate of 3.9% compared to growth of 0.6% in the first quarter of 2015 and 5.0% in the third quarter of 2014, as indicated by the Bureau of Economic Analysis report published by the U.S. Department of Commerce.

According to the U.S. Bureau Labor Statistics, the unemployment rate (seasonally adjusted) continued to fall to 5.1% as of September 30, 2015, down from 5.6% as of December 31, 2014 and 6.7% as of December 31, 2013. While the unemployment rate did show continued signs of improvement, recent jobs reports have been lower than expected by leading economists.

Total existing home sales in the U.S., as indicated by the National Association of Realtors, showed mixed signs with existing home sales at a seasonally adjusted 4.7 million units for the rolling twelve months ended August 31, 2015, up 6.1% from the rolling twelve month total of 4.4 million units as of August 31, 2014. Inventory levels were down slightly at a 5.2 months’ supply, or 2 million units, as of August 31, 2015, compared to a 5.6 months’ supply as of August 31, 2014. New home sales were up to a seasonally adjusted annual rate of 552 thousand units as of August 31, 2015, up 21.6% from 454 thousand as

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of August 31, 2014. Inventory for new homes decreased to a 4.7 months’ supply as of August 31, 2015 versus a 5.4 month supply as of August 31, 2014, while the median sales price of new homes increased 0.3% to $292.7 thousand for the same period. Home values of existing homes, as indicated by the Case-Shiller 20 city index (seasonally adjusted), showed an increase of 5.0% from July 2014 to July 2015. However, the pace of increasing values has fallen from the July 2014 year-over-year increase of 6.8%.

Bankruptcy filings, per the U.S. Court Statistics, also improved with total filings down 6.1% for the 12 months ending June 30, 2015, compared to the 12 months ending December 31, 2014, with business filings down 7.2% and personal filings down 6.1% for the period. It should be noted that the pace of reduction has slowed, and that business filings in Northern Illinois were up 6.8%, the first increases in over 3 years.

According to McGraw-Hill Financial compilation of Residential Real Estate Statistics, overall mortgage industry performance saw improvement with prime mortgage delinquency falling to 3.01% as of June 30, 2015 versus 3.25% as of December 31, 2014 and 3.49% as of June 30, 2014, according to the Mortgage Bankers Association. New foreclosures on prime loans were at 0.25% as of June 30, 2015, down from 0.28% as of December 31, 2014 and from 0.27% as of June 30, 2014. According to S&P Indices, first mortgages in default were also down at 0.84% as of August 31, 2015 from 0.91% as of August 31, 2014. The continued improvements are supported by a decrease in the affordability index (the ratio between mortgage payments and average income), which decreased 2.7% as of July 31, 2015 to 151.2 from July 31, 2014 at 155.4. The improving economic conditions year over year has led to the improvement in the overall consumer confidence index, ending August 31, 2015 at 101.5, up 8.7% from 93.4 as of August 31, 2014. It should be noted however, that the August 2015 index of 101.5 is down 2.2% from the January, 2015 index of 103.8.

According to the Beige Book published by the Federal Reserve Board in September 2015, overall economic activity was improved. The Fourth (Cleveland) Federal Reserve District reported a slight pace of expansion, while the Seventh (Chicago) Federal Reserve District and the twelfth District (San Francisco) reported moderate growth. 

On balance, the Cleveland District’s economy expanded at a slight pace. Factory output was stable. The housing market improved, with higher unit sales and prices. Nonresidential building contractors characterized backlogs as strong or strengthening. Retailers reported that their revenues were flat over the period and year over year. New-car sales rose slightly. Exploration in the Marcellus and Utica Shales declined, whereas mid-stream infrastructure projects moved forward. Freight volume contracted slightly. The demand for business and consumer credit continued to move slowly higher. Payrolls expanded slightly. Newly created positions typically required a higher-level skill set than in the past. Staffing firms reported a pickup in the number of job openings in healthcare and manufacturing; however, the number of placements did not keep pace. Wage pressures were intensifying in the construction, retail, and transportation sectors. Overall, input and finished-goods prices were steady.

Growth in economic activity in the Chicago District remained moderate in July and early August, and activity is expected to rise at a similar pace over the next 6 to 12 months. Credit conditions were little changed. Cost pressures also were about the same as during the last reporting period, with prices for most raw materials remaining low and limited wage growth. The condition of the corn and soybean crops was uneven across the District, with record yields possible in some areas and low yields likely in others. Growth in consumer spending continued at a moderate pace over the reporting period. Spending on discretionary items such as sporting goods, entertainment, general merchandise, and apparel generally increased at a faster rate than spending on necessities such as food and beverages. New and used vehicle sales continued to be strong. Vehicle transaction prices moved up further, increasing dealer profitability. Relatively low gas prices continued to cause a shift in consumer preferences toward light trucks. Growth in business spending remained moderate in July and early August. Most retailers and manufacturers reported comfortable inventory levels, though stocks remained slightly elevated at steel service centers because of the large volumes of imports over the past year. Some retail contacts said they planned to carry lower-than-normal inventories of winter- related items because of forecasts that a strong El Niño effect will raise temperatures this winter. The pace of capital spending remained moderate. Hiring and hiring plans also grew at a moderate pace. Labor demand was again strongest for skilled workers, particularly for many professional and technical occupations, sales, and skilled manufacturing and building trades. A staffing firm reported declining revenues, which they attributed primarily to moves by their clients toward hiring more permanent workers and toward more outsourcing.

Economic activity in the San Francisco District (covering the Bank’s Las Vegas market) grew at a moderate pace during the reporting period of July through mid-August. Overall price inflation remained limited, but upward wage pressures increased further. Lending trended up, and credit conditions improved somewhat. A few District contacts in the banking sector observed strong demand for talented employees and, due to vigorous competition, were unable to pass higher wages through to the prices charged for banking services. Hospitality sector contacts in the District expressed concerns that recent minimum

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wage increases may raise costs in their industry. Some District contacts noted an excess supply of retail space and tighter underwriting standards for new construction projects, which constrained the growth of new commercial units in their areas.

The economy in the state of Michigan noted improvements during the period. The unemployment rate, as indicated by the U.S. Bureau of Labor Statistics, improved to 5.1% as of August 31, 2015, down from 6.4% as of December 31, 2014 and 8.3% as of December 31, 2013. Other improvements included a 6.0% decline in total bankruptcies, per the U.S. Court Statistics, during the 12 months ending June 30, 2015 compared to the 12 months ending December 31, 2014.

As of September 30, 2015, $1.5 billion, or 32.7% of our total loans are to businesses and consumers in the Detroit-Warren-Livonia metropolitan statistical area (“MSA”), which includes Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the state of Michigan. Unemployment in the Detroit-Warren-Livonia MSA, as indicated by the U.S. Bureau of Labor Statistics, was at 6.2% as of August 31, 2015, from 6.5% as of December 31, 2014, and 8.0% at December 31, 2013. The Detroit MSA showed an increase in home prices as reported in the Case-Shiller index (seasonally adjusted) of 5.2% for the rolling twelve months ending July 31, 2015. It should be noted that the pace of increase has slowed from 8.4% for the 12 months ending July 31, 2014.

The Ohio economy also showed signs of slowing recovery. Unemployment was down at 4.7% as of August 31, 2015, compared to 5.1% as of December 31, 2014 and 7.1% as of December 31, 2013. The Cleveland MSA showed higher unemployment of 4.8% as of August 31, 2015, down from 5.2% as of December 31, 2014. Bankruptcies in Ohio, per the U.S. Court Statistics, were down 3.4% during the 12 months ending June 30, 2015 when compared to the 12 months ending December 31, 2014. New business bankruptcies were unchanged. The Case-Shiller index for the Cleveland market indicates housing prices increases have cooled and were up 3.0% for the twelve month period ending July 31, 2015, versus 0.9% increase for the 12 months ending July 31, 2014.

The Illinois economy also showed signs of a slowing recovery. Unemployment was down at 5.6% as of August 31, 2015, compared to 6.2% as of December 31, 2014 and 8.9% as of December 31, 2013. This is the lowest rate since March 2008. Unemployment in the Chicago MSA decreased to 5.6% as of August 31, 2015, down from 5.7% as of December 31, 2014 and from 9.1% as of December 31, 2013. Bankruptcies in the Northern Illinois region were down 4.0% for the 12 months ending June 30, 2015 compared to the 12 months ending December 31, 2014. However, business filings were up 6.8% for the same period. Home values, as indicated by the Case-Shiller index for the Chicago MSA were up 2.0% for the twelve-month period ending July 31, 2015, compared to 4.0% increase for the 12 months ending July 31, 2014.

The Indiana economy continued to recover. The unemployment rate was down at 4.6% as of August 31, 2015, compared to 5.9% as of December 31, 2014 and from 6.8% as of December 31, 2013. This is the lowest unemployment rate in Indiana since December 2007. Unemployment in the Elkhart MSA was also down at 3.6% as of August 31, 2015 versus 5.1% as of December 31, 2014, and 7.6% as of December 31, 2013. In addition, personal and business bankruptcy filings in Northern Indiana, per the U.S. Court Statistics, for the 12 months ending June 30, 2015 was down 2.9% compared to the 12 months ending December 31, 2014. Indiana real estate values have improved according to statistics from Zillow with prices increasing 2.7% for the twelve months ending August 31, 2015.

The Nevada economy also showed signs of gradual recovery. Unemployment was down at 6.8% as of August 31, 2015 compared to 7.0% as of December 31, 2014 and down from 9.0% as of December 31, 2013. This is Nevada’s lowest rate since June 2008. Bankruptcies in the Nevada region, according to Department of Justice reports, were down 9.2% for the 12 months ending June 30, 2015 compared to the 12 months ending December 31, 2014. Home values, as indicated by the Case-Shiller index for the Las Vegas market were up 6.2% for the 12 months ending July 31, 2015 versus an increase of 12.8% for the 12 months ending July 31, 2014.

Summary of Acquisition and Loss Share Accounting

We determined the fair value of our acquired assets and liabilities in accordance with accounting requirements for fair value measurement and acquisition transactions as promulgated in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”), ASC Topic 805, “Business Combinations” (“ASC 805”), and ASC Topic 820, “Fair Value Measurements and Disclosures.” The determination of the initial fair values on loans and other real estate purchased in an acquisition and the related FDIC indemnification asset require significant judgment and complexity.

At the time of each respective acquisition, we determine the fair value of our acquired loans on a loan by loan basis by dividing the loans into two categories: (1) specifically reviewed loans - loans where the future cash flows are estimated based

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on a specific review of the loan, and (2) non-specifically reviewed loans - loans where the future cash flows for each loan are estimated using an automated cash flow calculation model. For specifically reviewed loans, a designated group of credit officers, specialized in loan workouts and credit quality assessment, work with personnel from the acquired institution to review borrower cash payment activity, current appraisals, loan write ups, and watch list reports (including the current past due status and risk ratings assigned) to estimate future cash flows on the acquired loans. The estimated future cash flows are then discounted to determine initial fair value. For our acquisition of CF Bancorp approximately 50% of the acquired loan portfolio was specifically reviewed. For our acquisitions of First Banking Center and Peoples State Bank approximately 60% of the acquired loan portfolios were specifically reviewed for each of these acquisitions. For our acquisition of First Place Bank approximately 30% of the acquired loan portfolio was specifically reviewed. For our acquisition of Talmer West Bank approximately 50% of the acquired loan portfolio was specifically reviewed. For our acquisition of First of Huron Corp., the specifically reviewed loan population included all loans with an outstanding balance of $250 thousand or more and a substantial portion of impaired loans with a balance of $200 thousand or more as of the February 6, 2015 acquisition date, resulting in approximately 35% of the acquired loan portfolio being specifically reviewed.

Non-specifically reviewed loans are categorized by risk profile and processed through an automated cash flow calculation model to generate expected cash flows on a loan by loan basis using contractual loan payment information such as coupon, payment type and amounts, and remaining maturity, along with assumptions that are assigned to each individual loan based on risk cohorts. Risk profiles are determined based on loan type, risk rating, delinquency history, current delinquency status, vintage, and collateral type. For our non-specifically reviewed loans, we apply life of loan default and loss assumptions, defined at a cohort level, to estimate future cash-flows. The assumptions are based on credit migration (migration of risk rating and past due status) combined with default, severity and prepayment data indicative of the market based upon market experience and benchmarking analysis of similar loans and/or portfolio sales and valuation. This information is captured through observation of comparable market transactions. Estimated future cash flows are discounted for each loan to determine initial fair value.

Where a loan exhibits evidence of credit deterioration since origination and it is probable at the acquisition date that we will not collect all principal and interest payments in accordance with the terms of the loan agreement, we account for the loan under ASC 310-30, as a purchased credit impaired loan. At the date of acquisition, the majority of loans acquired in the CF Bancorp, First Banking Center, People State Bank and Community Central Bank acquisitions, as well as approximately 30% of the loans acquired in our acquisition of First Place Bank, approximately 40% of the loans acquired in our acquisition of Talmer West Bank and approximately 25% of the loans acquired in our acquisition of First of Huron Corp. were accounted for under ASC 310-30 as purchased credit impaired loans. We account for all purchased credit impaired loans on a loan by loan basis. We recognize the expected shortfall of expected future cash flows on these loans, as compared to the contractual amount due, as a nonaccretable discount. Any excess of the net present value of expected future cash flows over the acquisition date fair value is recognized as accretable yield. The accretable yield includes both the expected coupon of the loan and the discount accretion. We recognize accretable discount as interest income over the expected remaining life of the purchased credit impaired loan using a method that approximates the level yield method.

Fair value premiums and discounts established on acquired loans accounted for outside the scope of ASC 310-30 fall under FASB ASC Subtopic 310-20, “Receivables - Nonrefundable Fees and Other Costs” (“ASC 310-20”) and are accreted or amortized into interest income over the remaining term of the loan as an adjustment to the related loan's yield.

Because we record all acquired loans at fair value, we do not record an allowance for loan losses related to acquired loans on the acquisition date. We re-estimate expected cash flows on our purchased credit impaired loans on a quarterly basis. This re-estimation process is performed on a loan by loan basis and replicates the methods used in determining the initial fair value at the acquisition date. We aim to segment the purchased credit impaired loan portfolio between those that are specifically reviewed and those that are non-specifically reviewed loans to maintain similar or greater coverage as at the acquisition date in the specifically reviewed loan population.

Any decline in expected cash flows identified during the quarterly re-estimation process results in impairment which is measured based on the present value of the new expected cash flows, discounted using the pre-impairment accounting yield of the loan, compared to the recorded investment in the loan. An impairment that is due to a decline in expected cash flows is known as credit impairment, while an impairment that is due to a change in the expected timing of such cash flows is known as timing impairment. If any portion of the impairment is due to credit impairment, we record all of the impairment as provision for loan losses during the period. However, if the impairment is only related to a change in the expected timing of the cash flows, the impairment is recognized prospectively as a decrease in yield on the loan. Declines in cash flow expectations on covered loans which are due to credit impairment also result in an increase to the FDIC indemnification asset which is recorded as noninterest income in “FDIC loss sharing income” in our consolidated statements of income in the period. Any improvements in expected cash flows and the effect of changes in expected timing in the receipt of the expected cash flows,

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once any previously recorded impairment is recaptured, is recognized prospectively as an adjustment to the accretable yield on the loan. Improvements in cash flows on loans covered by a loss share agreement result in a decline in the expected indemnification cash flows which are reflected as a downward yield adjustment on the FDIC indemnification assets.

We modify loans in the normal course of business and assess all loan modifications to determine whether a modification constitutes a troubled debt restructuring (“TDR”) in accordance with ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors” (“ASC 310-40”). For non-purchased credit impaired loans excluded from ASC 310-30 accounting, a modification is considered a TDR when a borrower is experiencing difficulties and we have granted a concession to the borrower that we would not normally consider and we conclude the concession results in an inability to collect all amounts due, including interest accrued at the original contractual terms. The concessions granted may include: principal deferral, interest rate concession, forbearance, principal reduction or A/B note restructure (where the original loan is restructured into two notes where, one reflects the portion of the modified loan which is expected to be collected, and one that is fully charged off). None of the modifications to date were due to partial satisfaction of the loan.

For purchased credit impaired loans accounted for individually under ASC 310-30 (which is all of our purchased credit impaired loans), a modification is considered a TDR when a borrower is experiencing financial difficulties and the effective yield after the modification is less than the effective yield at the time of the purchase in association with consideration of qualitative factors included within ASC 310-40. When a modification qualifies as a TDR and was initially individually accounted for under ASC 310-30, the loan is required to be moved from ASC 310-30 accounting and accounted for under ASC 310-40. In order to accomplish the transfer of the accounting for the TDR from ASC 310-30 to ASC 310-40, the loan is essentially retained in the ASC 310-30 accounting model and subject to the periodic cash flow re-estimation process. Similar to loans accounted for under ASC 310-30, deterioration in expected cash flows results in the recognition of impairment and an allowance for loan loss. However, unlike loans accounted for under ASC 310-30, improvements in estimated cash flows on these loans result only in recapturing previously recognized allowance for loan losses and the yield remains at the last yield recognized under ASC 310-30.

Acquired loans that are paid in full or are otherwise settled results in accelerated recognition of any remaining loan discount through “Accelerated discount on acquired loans” in our consolidated statements of income in the period. If such loans are covered loans, any remaining FDIC indemnification asset no longer expected to be received is also written off through “Accelerated discount on acquired loans” in our consolidated statements of income in the corresponding period.

The loss share agreements from our FDIC-assisted acquisitions and the purchase accounting impact from our acquisitions create volatility in our cash flows and operating results. The effects of the loss share agreements and purchase accounting, primarily on purchased credit impaired loans, on cash flows and operating results following an acquisition can create volatility as we work with borrowers to determine appropriate repayment terms or alternate resolutions. The effects will depend primarily on the ability of borrowers to make required payments over an extended period of time. At acquisition, management believes sufficient inherent discounts representing the expected losses compared to their acquired contractual payment amounts, were established. As a result, our operating results would only be adversely affected by losses to the extent that those losses exceed the expected losses reflected in the fair value at the acquisition date.In addition, as the loss share agreements cover up to a 10-year period (five years for loans other than single family residential mortgage loans), changing economic conditions will likely affect the timing of future charge-offs and the resulting reimbursements from the FDIC. Management believes that any recapture of interest income and recognition of cash flows from borrowers or amounts received from the FDIC as part of the FDIC indemnification asset may be incurred unevenly over this period, as we exhaust our collection efforts under our normal practices.

Critical Accounting Policies

Our consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States, the most significant of which are described in Note 1, “Summary of Significant Accounting Policies,” in our 2014 Annual Report on 10-K. These policies require the reliance on estimates and assumptions, which may prove inaccurate or are subject to variations. Changes in underlying factors, assumptions, or estimates could have a material impact on our future financial condition and results of operations. The most critical of these significant accounting policies are the policies related to the allowance for loan losses, fair valuation methodologies, purchased loans, the FDIC indemnification asset and income taxes. These policies were reviewed with the Audit Committee of the Board of Directors and are discussed more fully on pages 76 through 81 in our 2014 Annual Report on Form 10-K. As of the date of this report, we did not believe there were any material changes in the nature of categories of the critical accounting policies or estimates and assumptions from those discussed in our 2014 Annual Report on Form 10-K.

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Financial Results

We had net income for the three months ended September 30, 2015 of $20.0 million, or $0.27 per average diluted share, compared to $19.5 million, or $0.26 per average diluted share, for the same period ended September 30, 2014. The increase in net income of $520 thousand for the three months ended September 30, 2015, compared to the three months ended September 30, 2014, primarily reflects an increase in net interest income of $3.4 million, a decrease in noninterest expense of $3.4 million and a decrease in income tax provision of $3.5 million, partially offset by a decrease in noninterest income of $10.6 million. The three months ended September 30, 2014 included a $14.4 million net gain on sale of branches within noninterest income.

We had net income for the nine months ended September 30, 2015 of $47.0 million, or $0.63 per average diluted share, compared to $78.3 million, or $1.04 per average diluted share, for the same period ended September 30, 2014. The decrease in net income for the nine months ended September 30, 2015 was primarily due to the inclusion of the $42.0 million bargain purchase gain from the January 1, 2014 acquisition of Talmer West Bank in our results for the nine months ended September 30, 2014. Excluding the bargain purchase gain, net income for the nine months ended September 30, 2015 increased $10.6 million, when compared to the results for the nine months ended September 30, 2014. This increase primarily reflects a reduction in noninterest expense of $13.1 million, a decrease in total provision for loan losses of $6.0 million, an increase in net interest income of $3.5 million and an increase in noninterest income of $3.2 million, partially offset by an increase in income tax provision of $15.0 million. The nine months ended September 30, 2014 included a $14.4 million net gain on sale of branches within noninterest income.

Net Interest Income

Net interest income is the difference between interest income and yield-related fees earned on assets and interest expense paid on liabilities. Adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis. The “Analysis of Net Interest Income-Fully Taxable Equivalent” tables within this financial review provide an analysis of net interest income for the three and nine months ended September 30, 2015 and 2014. The “Rate/Volume Analysis” tables describe the extent to which changes in interest rates and changes in volume of earning assets and interest-bearing liabilities have affected our net interest income on a fully taxable equivalent (“FTE”) basis for the three and nine months ended September 30, 2015 and 2014.

We had net interest income of $55.6 million for the three months ended September 30, 2015, an increase of $3.4 million from $52.2 million for the same period in 2014. The increase in net interest income in the three months ended September 30, 2015, compared to the same period in 2014, was primarily due to a decrease of $2.3 million in negative accretion of the FDIC indemnification asset and a $2.0 million increase in interest and fees on loans, partially offset by an increase of $2.0 million in total interest expense. The decrease in negative accretion of the FDIC indemnification asset was primarily driven by the expiration of the first (and largest) of our four FDIC non-single family loss share agreements effective July 1, 2015. The increases in interest expense and interest and fees on loans were primarily driven by the significant growth in total deposits and loans, respectively. Our net interest margin (FTE) for the three months ended September 30, 2015 decreased 29 basis points to 3.76% from 4.05% for the comparable period in 2014. The decrease in net interest margin was primarily due to the decline in the benefit provided by our higher yielding acquired loans as the balances continue to run-off, partially offset by the decrease in negative accretion on the FDIC indemnification asset, as we continue to reduce the outstanding amount of this asset.

We had net interest income of $156.3 million for the nine months ended September 30, 2015, an increase of $3.5 million from $152.8 million for the same period in 2014. The nine months ended September 30, 2015 included an $8.6 million increase in interest income partially offset by a $5.1 million increase in interest expense compared to the same period in 2014. The increase in interest income was primarily driven by increases of $9.9 million in interest and fees on loans and $1.7 million in interest on securities, partially offset by a $3.3 million increase in negative accretion of the FDIC indemnification asset. The increases in interest and fees on loans, interest on securities and interest expense were primarily driven by the significant growth in total loans, securities and deposits, respectively. The increase in negative accretion of the FDIC indemnification asset for the nine months ended September 30, 2015 compared to the same period in 2014, was primarily driven by our continued increases in cash flow expectations on covered loans as a result of our quarterly re-estimations. Our net interest margin (FTE) for the nine months ended September 30, 2015 decreased 43 basis points to 3.67% from 4.10% for the comparable period in 2014. The decrease in net interest margin was primarily due to the decline in the benefit provided by our higher yielding acquired loans as the balances continue to run-off and an increase in deposit funding costs.

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Our net interest margin benefits from discount accretion on our purchased credit impaired loan portfolios, a component of our accretable yield. The accretable yield represents the excess of the net present value of expected future cash flows over the acquisition date fair value and includes both the expected coupon of the loan and the discount accretion. The accretable yield is recognized as interest income over the expected remaining life of the purchased credit impaired loan. For the three months ended September 30, 2015 and 2014, the yield on total loans was 5.09% and 5.78%, respectively, while the yield on total loans generated using only the expected coupon (with respect to purchased credit impaired loans) would have been 4.34% and 4.67%, respectively. For the nine months ended September 30, 2015 and 2014, the yield on total loans was 5.23% and 5.90%, respectively, while the yield on total loans generated using only the expected coupon (with respect to purchased credit impaired loans) would have been 4.40% and 4.79%, respectively. The difference between the actual yield earned on total loans and the yield generated based on the contractual coupon (not including any interest income for loans in nonaccrual status) represents excess accretable yield.

Our net interest margin is also adversely impacted by the negative yield on the FDIC indemnification asset. Because our quarterly cash flow re-estimations have continuously resulted in improvements in overall expected cash flows on covered loans, our expected payments from the FDIC under our loss share agreements have declined, resulting in a negative yield on the FDIC indemnification asset, which partially offsets the benefits provided by the excess accretable yield discussed above. The negative yield on the FDIC indemnification asset was 49.20% and 61.58% for the three and nine months ended September 30, 2015, respectively, compared to 26.61% and 22.11% for the three and nine months ended September 30, 2014, respectively. The combination of the excess accretable yield and the negative yield on the FDIC indemnification asset benefited net interest margin by 30 basis points and 13 basis points for the three and nine months ended September 30, 2015, compared to 35 basis points and 33 basis points for the three and nine months ended September 30, 2014. The following tables set forth information related to our average balance sheet, average yields on assets, and average costs of liabilities. We derived these yields by dividing income or expense by the average balance of the corresponding assets or liabilities. We derived average balances from the daily balances throughout the periods indicated.

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Analysis of Net Interest Income — Fully Taxable Equivalent

	For the three months ended September 30,
	2015								2014
(Dollars in thousands)	Average Balance			Interest (1)			Average Rate (2)		Average Balance			Interest (1)			Average Rate (2)
Earning assets:
Interest earning balances	$	172,781		$	107		0.24	%	$	264,158		$	159		0.24	%
Federal funds sold and other short-term investments	182,826			342			0.74		76,724			130			0.67
Investment securities (3):
Taxable	575,071			2,731			1.88		515,388			2,241			1.73
Tax-exempt	266,357			1,873			3.69		205,329			1,444			3.77
Federal Home Loan Bank stock	25,416			285			4.46		17,333			177			4.04
Gross uncovered loans (4)	4,494,551			53,749			4.74		3,548,152			44,443			4.97
Gross covered loans (4)	188,158			6,329			13.34		439,366			13,685			12.36
FDIC indemnification asset	35,211			(4,366		)	(49.20	)	99,335			(6,663		)	(26.61	)
Total earning assets	5,940,371			61,050			4.12	%	5,165,785			55,616			4.31	%
Non-earning assets:
Cash and due from banks	91,225								114,156
Allowance for loan losses	(53,900		)						(55,579		)
Premises and equipment	44,552								52,141
Core deposit intangible	13,802								14,398
Goodwill	3,524								—
Other real estate owned and repossessed assets	43,420								49,440
Loan servicing rights	58,038								73,996
FDIC receivable	3,878								5,886
Company-owned life insurance	105,377								95,930
Other non-earning assets	241,922								230,955
Total assets	$	6,492,209							$	5,747,108
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	823,741		$	401		0.19	%	$	657,107		$	190		0.11	%
Money market and savings deposits	1,293,737			620			0.19		1,237,984			487			0.16
Time deposits	1,523,096			2,582			0.67		1,236,286			1,611			0.52
Other brokered funds	365,825			541			0.59		361,929			288			0.32
Short-term borrowings	219,663			350			0.63		219,859			122			0.22
Long-term debt	407,154			909			0.89		280,054			701			0.99
Total interest-bearing liabilities	4,633,216			5,403			0.46	%	3,993,219			3,399			0.34	%
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits	1,051,400								961,558
FDIC clawback liability	28,774								26,493
Other liabilities	47,779								26,968
Shareholders’ equity	731,040								738,870
Total liabilities and shareholders’ equity	$	6,492,209							$	5,747,108
Net interest income				$	55,647							$	52,217
Interest spread							3.66	%							3.97	%
Net interest margin as a percentage of interest earning assets							3.72	%							4.01	%
Tax equivalent effect							0.04	%							0.04	%
Net interest margin on a fully tax equivalent basis							3.76	%							4.05	%

(1) Interest income is shown on an actual basis and does not include taxable equivalent adjustments.

(2) Average rates are presented on an annual basis and include a taxable equivalent adjustment to interest income of $604 thousand and $505 thousand on tax-exempt securities for the three months ended September 30, 2015 and 2014, respectively, using the statutory tax rate of 35%.

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(3) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(4) Includes nonaccrual loans.

	For the nine months ended September 30,
	2015								2014
(Dollars in thousands)	Average Balance			Interest (1)			Average Rate (2)		Average Balance			Interest (1)			Average Rate (2)
Earning assets:
Interest earning balances	$	179,234		$	310		0.23	%	$	304,413		$	546		0.24	%
Federal funds sold and other short-term investments	144,592			776			0.72		74,651			401			0.72
Investment securities (3):
Taxable	532,701			7,429			1.86		501,122			6,246			1.67
Tax-exempt	251,629			5,146			3.60		189,117			4,622			4.41
Federal Home Loan Bank stock	22,176			754			4.55		17,561			690			5.25
Gross uncovered loans (4)	4,284,378			152,174			4.75		3,341,423			125,333			5.01
Gross covered loans (4)	272,819			26,161			12.82		476,465			43,070			12.09
FDIC indemnification asset	48,122			(22,164		)	(61.58	)	114,190			(18,887		)	(22.11	)
Total earning assets	5,735,651			170,586			4.01	%	5,018,942			162,021			4.36	%
Non-earning assets:
Cash and due from banks	89,787								99,858
Allowance for loan losses	(52,682		)						(57,202		)
Premises and equipment	46,886								55,160
Core deposit intangible	14,157								15,635
Goodwill	3,046								—
Other real estate owned and repossessed assets	45,699								55,014
Loan servicing rights	58,062								76,809
FDIC receivable	5,388								6,440
Company-owned life insurance	103,559								75,908
Other non-earning assets	237,514								222,889
Total assets	$	6,287,067							$	5,569,453
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	808,473		$	1,073		0.18	%	$	693,346		$	630		0.12	%
Money market and savings deposits	1,258,174			1,653			0.18		1,328,229			1,473			0.15
Time deposits	1,381,282			6,540			0.63		1,257,393			4,534			0.48
Other brokered funds	478,775			1,771			0.49		175,169			352			0.27
Short-term borrowings	114,168			638			0.75		150,057			330			0.29
Long-term debt	424,148			2,623			0.83		234,087			1,902			1.09
Total interest-bearing liabilities	4,465,020			14,298			0.43	%	3,838,281			9,221			0.32	%
Noninterest-bearing liabilities and shareholders’ equity:
Noninterest-bearing demand deposits	983,677								949,516
FDIC clawback liability	27,995								25,790
Other liabilities	54,574								37,723
Shareholders’ equity	755,801								718,143
Total liabilities and shareholders’ equity	$	6,287,067							$	5,569,453
Net interest income				$	156,288							$	152,800
Interest spread							3.58	%							4.04	%
Net interest margin as a percentage of interest earning assets							3.64	%							4.07	%
Tax equivalent effect							0.03	%							0.03	%
Net interest margin on a fully tax equivalent basis							3.67	%							4.10	%

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(1) Interest income is shown on an actual basis and does not include taxable equivalent adjustments.

(2) Average rates are presented on an annual basis and include a taxable equivalent adjustment to interest income of $1.6 million and $1.6 million on tax-exempt securities for the nine months ended September 30, 2015 and 2014, respectively, using the statutory tax rate of 35%.

(3) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(4) Includes nonaccrual loans.

Rate-Volume Analysis

The tables below present the effect of volume and rate changes on interest income and expense.  Changes in volume are changes in the average balance multiplied by the previous year’s average rate.  Changes in rate are changes in the average rate multiplied by the average balance from the previous year.  The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate.

	For the three months ended September 30, 2015 vs. 2014
	Increase (Decrease) Due to:						Net Increase
(Dollars in thousands)	Rate			Volume			(Decrease)
Interest earning assets
Interest earning balances	$	4		$	(56	)	$	(52	)
Federal funds sold and other short-term investments	15			197			212
Investment securities:
Taxable	217			273			490
Tax-exempt	—			429			429
FHLB stock	19			89			108
Gross uncovered loans	(2,090		)	11,396			9,306
Gross covered loans	1,017			(8,373		)	(7,356		)
FDIC indemnification asset	(3,581		)	5,878			2,297
Total interest income	(4,399		)	9,833			5,434
Interest-bearing liabilities
Interest-bearing demand deposits	154			57			211
Money market and savings deposits	110			23			133
Time deposits	548			423			971
Other brokered funds	250			3			253
Short-term borrowings	228			—			228
Long-term debt	(82		)	290			208
Total interest expense	1,208			796			2,004
Change in net interest income	$	(5,607	)	$	9,037		$	3,430

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	For the nine months ended September 30, 2015 vs. 2014
	Increase (Decrease) Due to:						Net Increase
(Dollars in thousands)	Rate			Volume			(Decrease)
Interest earning assets
Interest earning balances	$	(19	)	$	(217	)	$	(236	)
Federal funds sold and other short-term investments	—			375			375
Investment securities:
Taxable	773			410			1,183
Tax-exempt	(837		)	1,361			524
FHLB stock	(101		)	165			64
Gross uncovered loans	(6,948		)	33,789			26,841
Gross covered loans	2,479			(19,388		)	(16,909		)
FDIC indemnification asset	(18,979		)	15,702			(3,277		)
Total interest income	(23,632		)	32,197			8,565
Interest-bearing liabilities
Interest-bearing demand deposits	326			117			443
Money market and savings deposits	261			(81		)	180
Time deposits	1,526			480			2,006
Other brokered funds	464			955			1,419
Short-term borrowings	403			(95		)	308
Long-term debt	(538		)	1,259			721
Total interest expense	2,442			2,635			5,077
Change in net interest income	$	(26,074	)	$	29,562		$	3,488

Provision for Loan Losses

We established an allowance for loan losses on both covered and uncovered loans through a provision for loan losses charged as an expense in our consolidated statements of income.  Management reviews our loan portfolio, consisting of originated loans and purchased loans that are not covered by loss sharing agreements with the FDIC, on a quarterly basis to evaluate our outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.

We did not record an allowance for loan losses at acquisition for purchased uncovered or covered loans as these loans were recorded at fair value, based on a discounted cash flow methodology, at the date of each respective acquisition.  We re-estimate expected cash flows on a quarterly basis for all loans purchased with credit impairment.  We record a provision for loan losses during the period for any decline in expected cash flows. Conversely, any improvement in expected cash flows is recognized prospectively as an adjustment to the yield on the loan once any previously recorded impairment is recaptured.

The provision for credit losses on off balance sheet items, a component of “other expense” in our consolidated statements of income, reflects management’s assessment of the adequacy of the allowance for credit losses on lending-related commitments.

For a further discussion of the allowance for loan losses, refer to the “Allowance for Loan Losses” section of this financial review.

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Uncovered loans

Our provision for loan losses on uncovered loans was $3.7 million for the three months ended September 30, 2015, compared to $7.8 million for the three months ended September 30, 2014. Our provision for loan losses on uncovered loans was $8.1 million for the nine months ended September 30, 2015, compared to $17.4 million for the nine months ended September 30, 2014. Our allowance for loan losses on uncovered loans was $45.1 million, or 1.00% of uncovered loans at September 30, 2015, compared to $33.8 million, or 0.87% of uncovered loans, at December 31, 2014. The provision for loan losses on uncovered loans for the three and nine months ended September 30, 2015 primarily reflects impairment recorded as a result of our re-estimation of cash flows for uncovered purchased credit impaired loans and additional provisions for organic loan growth outside of our acquisition of First of Huron Corp., partially offset by the relief of allowance for loan losses due to payments received on uncovered loans previously charged-off and/or carrying an allowance for loan losses. The provision for loan losses on uncovered loans for the three and nine months ended September 30, 2014 primarily reflects impairment recorded as a result of our re-estimation of cash flows for uncovered purchased credit impaired loans and additional provisions for organic loan growth outside of our acquisition of Talmer West Bank, partially offset by the impact of improvements in historical loss factors. We recorded impairment related to re-estimations of cash flows for uncovered purchased credit impaired loans of $3.4 million and $5.7 million for the three and nine months ended September 30, 2015, respectively, and $3.4 million and $11.6 million, for the three and nine months ended September 30, 2014, respectively. The re-estimations also resulted in improvements in gross cash flow expectations on uncovered purchased credit impaired loans of $12.5 million and $46.8 million for the three and nine months ended September 30, 2015, respectively, compared to $14.6 million and $39.0 million for the three and nine months ended September 30, 2014, respectively, which will be recognized prospectively as an increase in the accretable yield and accreted into interest income over the expected remaining life of the related uncovered purchased credit impaired loan.

Covered loans

Our provision benefit for loan losses on covered loans was $3.0 million for the three months ended September 30, 2015, compared to a benefit of $6.3 million for the three months ended September 30, 2014. Our provision benefit for loan losses on covered loans was $12.8 million for the nine months ended September 30, 2015, compared to a benefit of $16.1 million for the nine months ended September 31, 2014. Our allowance for loan losses on covered loans was $10.8 million, or 5.76% of total covered loans, at September 30, 2015 compared to $21.4 million, or 6.16% of total covered loans, at December 31, 2014. The provision benefit for loan losses of covered loans for the three and nine months ended September 30, 2015 and the nine months ended September 30, 2014 primarily reflects the relief of allowance for loan losses due to payments received on covered loans previously charged-off and/or carrying an allowance for loan loss, partially offset by impairment recorded as a result of our re-estimation of cash flows for covered purchased credit impaired loans. The provision benefit for loan losses on covered loans for the three months ended September 30, 2014 reflected the relief of allowance for loan losses due to payments received on covered loans previously charged-off and/or carrying an allowance for loan loss and impairment relief recorded as a result of our re-estimation of cash flows for covered purchased credit impaired loans. We recorded impairment related to re-estimations of cash flows for covered purchased credit impaired loans of $24 thousand and $3.0 million for the three and nine months ended September 30, 2015, respectively, relief of impairment of $1.3 million for the three months ended September 30, 2014 and impairment of $1.0 million for the nine months ended September 30, 2014. The re-estimations also resulted in improvements in gross cash flow expectations on covered purchased credit impaired loans of $3.6 million and $20.4 million, for the three and nine months ended September 30, 2015, respectively, compared to $17.4 million and $33.9 million for the three and nine months ended September 30, 2014, respectively, which will be recognized prospectively as an increase in the accretable yield and accreted into interest income over the expected remaining life of the related covered purchased credit impaired loan.

A substantial portion of the provision or benefit for loan loss on covered loans is offset by FDIC loss sharing income. An analysis of the changes in the allowance for loan losses, including charge-offs and recoveries by loan category, is provided in the “Analysis of the Allowance for Loan Losses - Uncovered” and the “Analysis of the Allowance for Loan Losses - Covered” tables in this financial review.

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The following table details the components of the provision for loan losses on covered loans and the impact to net income.

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Provision (benefit) for loan losses - covered:
Net impairment recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	$	24		$	(1,329	)	$	2,962		$	1,036
Additional benefit recorded, net of charge-offs, for covered loans	(2,990		)	(4,946		)	(15,729		)	(17,130		)
Total benefit for loan losses-covered	$	(2,966	)	$	(6,275	)	$	(12,767	)	$	(16,094	)
Less: FDIC loss share income:
Income (expense) recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	(40		)	176			1,002			3,680
Expense recorded, to offset benefit, for covered loans	(1,801		)	(2,978		)	(10,125		)	(10,445		)
Total loss sharing expense due to provision for loan losses-covered	(1,841		)	(2,802		)	(9,123		)	(6,765		)
Net (increase) decrease to income before taxes:
Net (income) expense recorded as a result of re-estimation of cash flows on loans accounted for under ASC 310-30 (1)	64			(1,505		)	1,960			(2,644		)
Net income recorded, for covered loans including those accounted for under ASC 310-20 and ASC 310-40	(1,189		)	(1,968		)	(5,604		)	(6,685		)
Net (increase) decrease to income before taxes	$	(1,125	)	$	(3,473	)	$	(3,644	)	$	(9,329	)

(1) The results of re-estimations also included cash flow improvements to be recognized prospectively as an adjustment to the accretable yield on the related covered loans of $3.6 million and $17.4 million for the three months ended September 30, 2015 and 2014, respectively and $20.4 million and $33.9 million for the nine months ended September 30, 2015 and 2014, respectively. 

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Noninterest Income

The following table presents noninterest income for the three and nine months ended September 30, 2015 and 2014.

	For the three months ended  September 30,						For the nine months ended  September 30,
(Dollars in thousands)	2015			2014			2015			2014
Noninterest income
Deposit fee income	$	2,494		$	3,047		$	7,375		$	9,533
Mortgage banking and other loan fees:
Changes in loan servicing rights fair value due to valuation inputs or assumptions (1)	(3,831		)	(176		)	(4,769		)	(6,581		)
Other	2,110			2,241			6,485			8,609
Total mortgage banking and other loans fees	(1,721		)	2,065			1,716			2,028
Net gain on sales of loans	6,815			4,083			24,181			12,808
Net gain on sale of branches	—			14,410			—			14,410
Bargain purchase gain	—			—			—			41,977
FDIC loss sharing income	(2,696		)	(2,420		)	(9,692		)	(5,967		)
Accelerated discount on acquired loans	9,491			3,663			25,133			14,455
Net gain (loss) on sales of securities	202			244			101			(2,066		)
Company-owned life insurance	740			806			2,336			1,886
Other income	4,017			4,076			11,720			12,601
Total noninterest income	$	19,342		$	29,974		$	62,870		$	101,665

(1) Represents estimated fair value changes primarily due to prepayment speeds and market-driven changes in interest rates. 

Noninterest income decreased $10.6 million to $19.3 million for the three months ended September 30, 2015, from the same period of 2014. The decrease in noninterest income for the three months ended September 30, 2015, compared to 2014, was primarily due to the net gain on sale of branches of $14.4 million recognized in the three months ended September 30, 2014 and a decrease in mortgage banking and other loan fees of $3.8 million in 2015, partially offset by increases in accelerated discount on acquired loans of $5.8 million and in net gain on sales of loans of $2.7 million. The decrease in mortgage banking and other loan fees primarily reflects the change in the fair value of loan servicing rights due to interest rate fluctuations that impacted assumed prepayment speeds which decreased earnings by $3.8 million in the three months ended September 30, 2015, compared to a decrease of $176 thousand for the same period in 2014. Changes in the fair value of loan servicing rights due to reductions in servicing rights from loans paid off during the period were a detriment to earnings of $2.0 million for the three months ended September 30, 2015 and $1.8 million for the same period in 2014. The increase in accelerated discount on acquired loans for the three months ended September 30, 2015 was as a result of cash payments received outside of expected terms. The increase in net gain on sales of loans for the three months ended September 30, 2015 was driven by an increase in the volume of loans originated and sold in the third quarter of 2015.

Noninterest income decreased $38.8 million to $62.9 million for the nine months ended September 30, 2015, from $101.7 million for the same period of 2014. The decrease in noninterest income for the nine months ended September 30, 2015, compared to 2014, was primarily due to the recognition of $42.0 million of bargain purchase gain related to our acquisition of Talmer West Bank in the first quarter of 2014 and $14.4 million of net gain on sale of branches recognized in the third quarter of 2014. Excluding the bargain purchase gain and the net gain on sales of branches recognized in the nine months ended September 30, 2014, noninterest income increased $17.6 million in the nine months ended September 30, 2015, compared to the same period in 2014, primarily due to increases in net gain on sales of loans of $11.4 million and in accelerated discount on acquired loans of $10.7 million, partially offset by a decrease in FDIC loss sharing income of $3.7 million. The increase in net gain on sales of loans was driven by an increase in the volume of loans originated and sold in the first nine months of 2015. The increase in accelerated discount on acquired loans for the nine months ended September 30, 2015 was as a result of cash payments received outside of expected terms. The decline in FDIC loss sharing income for the nine months ended September 30, 2015 primarily reflects the amounts owed to the FDIC related to recoveries received on previously claimed charge-offs.

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Noninterest Expenses

The following table presents noninterest expenses for the three and nine months ended September 30, 2015 and 2014.

	For the three months ended  September 30,				For the nine months ended  September 30,
(Dollars in thousands)	2015		2014		2015		2014
Noninterest expense
Salary and employee benefits	$	27,665	$	29,795	$	85,562	$	96,112
Occupancy and equipment expense	6,472		7,981		22,553		24,895
Data processing fees	1,356		1,610		5,015		5,610
Professional service fees	3,197		2,964		10,015		9,629
FDIC loss sharing expense	292		245		1,374		1,752
Bank acquisition and due diligence fees	113		239		1,944		3,436
Marketing expense	1,748		1,001		4,326		3,697
Other employee expense	722		621		2,482		2,016
Insurance expense	1,305		1,383		4,362		4,082
Other expense	4,959		5,424		20,084		19,553
Total noninterest expense	$	47,829	$	51,263	$	157,717	$	170,782

Noninterest expenses decreased $3.4 million to $47.8 million for the three months ended September 30, 2015, compared to the same period in 2014. The decrease in noninterest expense was primarily due to decreases of $2.1 million in salary and employee benefits expense and $1.5 million in occupancy and equipment expense. The decrease in salary and employee benefits and in occupancy and equipment expense were primarily due to the rationalization of staff levels and branches.

Noninterest expenses decreased $13.1 million to $157.7 million for the nine months ended September 30, 2015, from $170.8 million for the same period in 2014. The decrease in noninterest expense included a decrease in transaction and integration related expenses of $9.4 million, which is more fully discussed below. The decrease in noninterest expenses excluding transaction and integration related expenses for the nine months ended September 30, 2015 was $3.7 million, compared to 2014, and was primarily due to a decrease of $5.7 million in salary and employee benefits expense primarily due to the rationalization of staff levels.

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We had transaction and integration related expenses of $3.9 million for the nine months ended September 30, 2015 which included anticipated and paid severance payments for reductions in the work force following our acquisition and integration of First of Huron Corp. and the operational integration of Talmer West Bank, each of which were each completed in February 2015, system conversion expenses and bank acquisition and due diligence fees. We had transaction and integration related expenses of $13.3 million for the nine months ended September 30, 2014, which included severance expense, bank acquisition and due diligence fees, bonus payments related to our successful acquisition of Talmer West Bank, the merger of First Place Bank and Talmer Bank and the completion of our initial public offering, as well as expenses incurred related to the termination of certain software contracts. Our transaction and integration related expenses for the nine months ended September 30, 2015 and 2014 are detailed in the tables below.

	For the nine months ended September 30, 2015
(Dollars in thousands)	Actual		Transaction and integration related expenses		Excluding transaction and integration related expenses
Noninterest expense
Salary and employee benefits	$	85,562	$	972	$	84,590
Occupancy and equipment expense	22,553		—		22,553
Data processing fees	5,015		875		4,140
Professional service fees	10,015		88		9,927
FDIC loss sharing expense	1,374		—		1,374
Bank acquisition and due diligence fees	1,944		1,944		—
Marketing expense	4,326		—		4,326
Other employee expense	2,482		—		2,482
Insurance expense	4,362		—		4,362
Other expense	20,084		—		20,084
Total noninterest expense	$	157,717	$	3,879	$	153,838

	For the nine months ended September 30, 2014
(Dollars in thousands)	Actual		Transaction and integration related expenses		Excluding transaction and integration related expenses
Noninterest expense
Salary and employee benefits	$	96,112	$	5,810	$	90,302
Occupancy and equipment expense	24,895		2,844		22,051
Data processing fees	5,610		—		5,610
Professional service fees	9,629		400		9,229
FDIC loss sharing expense	1,752		—		1,752
Bank acquisition and due diligence fees	3,436		3,436		—
Marketing expense	3,697		449		3,248
Other employee expense	2,016		—		2,016
Insurance expense	4,082		—		4,082
Other expense	19,553		341		19,212
Total noninterest expense	$	170,782	$	13,280	$	157,502

Our core operating efficiency ratio, a non-GAAP financial measure, improved to 65.1% for the nine months ended September 30, 2015, compared to 74.8% for the nine months ended September 30, 2014. The efficiency ratio is a measure of noninterest expense as a percentage of net interest income and noninterest income. Our core efficiency ratio begins with the efficiency ratio and then excludes certain items deemed by management to not be related to regular operations including bargain purchase gains, net gain on sale of branches, the fair value adjustment to our loan servicing rights, transaction and integration related costs, FDIC loss sharing income and $1.8 million of net expense recognized in the second quarter of 2015 related to our targeted review of property efficiency which included a review of certain lease contracts resulting in lease buyouts, final sales of unused properties and impairments recognized on owned properties under review for potential upcoming

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sales. Please see the section entitled "Reconciliation of Non-GAAP Financial Measure" for a discussion of the limitations of our core operating efficiency and a reconciliation of this non-GAAP financial measure to the most comparable GAAP measure.

Income Taxes and Tax-Related Items

We recognized income tax expense of $6.4 million on $26.5 million of pre-tax income for the three months ended September 30, 2015, resulting in an effective tax rate of 24.3%, compared to income tax expense of $9.9 million on $29.4 million of pre-tax income for the three months ended September 30, 2014, resulting in an effective tax rate of 33.7%. The lower effective tax rate for the three months ended September 30, 2015 was primarily due to the finalization of the 2014 consolidated income tax return for Capital Bancorp, Ltd (Talmer West Bank's former parent holding company), which resulted in a larger amount of pre-ownership change loss carryforwards allocated to Talmer West Bank than we originally estimated.

We recognized income tax expense of $19.0 million on $66.1 million of pre-tax income for the nine months ended September 30, 2015, resulting in an effective tax rate of 28.8%, compared to income tax expense of $4.0 million on $82.4 million of pre-tax income for the nine months ended September 30, 2014, resulting in an effective tax rate of 4.9%. The effective tax rate for the nine months ended September 30, 2015 was impacted by the finalization of the 2014 consolidated income tax return for Capital Bancorp, Ltd discussed previously. The low effective tax rate for the nine months ended September 30, 2014 resulted primarily from treating the $42.0 million bargain purchase gain resulting from our acquisition of Talmer West Bank on January 1, 2014 as non-taxable based on the tax structure of the acquisition and the relief of $10.1 million of valuation allowance related to the deferred tax asset we acquired in our acquisition of First Place Bank.

Financial Condition

Balance Sheet

Total assets were $6.5 billion at September 30, 2015, an increase of $631.8 million compared to $5.9 billion at December 31, 2014. Of the $631.8 million increase, $218.4 million was related to assets acquired at fair value in our acquisition of First of Huron Corp. and its subsidiary bank, Signature Bank, net of the $13.4 million of cash consideration paid. The acquisition resulted in goodwill of $3.5 million that was recognized at the acquisition date and added $162.3 million of loans acquired at fair value. The increase in total assets of $413.4 million, setting aside the assets acquired at fair value in our acquisition of First of Huron Corp., was primarily due to increases of $450.1 million in uncovered loans, $105.9 million in securities available-for-sale and $75.0 million in cash and cash equivalents. These increases were partially offset by decreases in covered loans of $159.9 million and the FDIC indemnification asset of $36.5 million. The increase in uncovered loans, setting aside the loans acquired at fair value during the period, reflects loan growth primarily driven by growth in our commercial and industrial, commercial real estate and real estate construction portfolios, partially offset by a reduction in our residential real estate portfolio. The increase in securities available-for-sale reflects management's decision to invest in liquid assets while retaining accessibility to the funds for potential liquidity needs. The decrease in covered loans reflects run-off of covered loans. The decrease in the FDIC indemnification asset is primarily the result of the negative accretion on the indemnification asset resulting from improvements in expected cash flows on covered loans and new claims filed with the FDIC for losses incurred on covered loans.

Total liabilities were $5.8 billion at September 30, 2015, compared to $5.1 billion at December 31, 2014. We assumed $218.4 million of liabilities at fair value in our acquisition of First of Huron Corp. and its subsidiary bank, Signature Bank. The $678.6 million increase in liabilities for the nine months ended September 30, 2015, was primarily due to increases in total deposits of $576.6 million and long-term debt of $131.0 million, partially offset by a decrease in short-term borrowings of $33.7 million. The $576.6 million growth in total deposits includes $201.5 million of deposits acquired at fair value in our acquisition of First of Huron Corp., in addition to growth in time deposits of $375.1 million, interest-bearing demand deposits of $152.9 million, money market and savings deposits of $82.2 million and noninterest-bearing demand deposits of $71.7 million. These increases were partially offset by a decline in other brokered funds of $306.8 million. The strong growth in core deposit balances and the decreases in non-core deposit balances reflects management’s drive to increase core deposit growth achieved through new programs initiated.

Total shareholders’ equity at September 30, 2015 was $714.8 million, a decrease of $46.8 million compared to $761.6 million at December 31, 2014. The decrease was primarily the result of our repurchase of 5.1 million shares of our Class A common stock for $75.0 million and our repurchase of warrants to purchase 2.5 million shares of our Class A common stock for $19.9 million, partially offset by our net income for the nine months ended September 30, 2015 of $47.0 million.

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Loans

Our loan portfolio represents a broad range of borrowers primarily in the Michigan, Ohio, Illinois, Indiana, Wisconsin and Nevada markets, comprised of residential real estate, commercial real estate, commercial and industrial, real estate construction and consumer financing loans.  All loans acquired in the CF Bancorp acquisition and all loans (except consumer loans) acquired in the First Banking Center, Peoples State Bank and Community Central Bank acquisitions were acquired under loss share agreements with the FDIC that call for the FDIC to reimburse us for a portion of our losses incurred on such loans, and we present covered loans separately from uncovered loans due to these loss share agreements. Effective July 1, 2015, the non-single family loss share agreement for our CF Bancorp acquisition (our largest failed bank transaction) expired, and we will no longer receive reimbursement from the FDIC for losses on loans formerly covered by that agreement.

Residential real estate loans represent loans to consumers for the purchase or refinance of a residence.  These loans are generally financed over a 15- to 30-year term and, in most cases, are extended to borrowers to finance their primary residence with both fixed-rate and adjustable-rate terms.  Residential real estate loans also include home equity loans and lines of credit that are secured by a first- or second-lien on the borrower’s residence.  Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.

Commercial real estate loans consist of term loans secured by a mortgage lien on the real property, such as apartment buildings, office and industrial buildings, retail shopping centers and farmland.

Commercial and industrial loans include financing for commercial purposes in various lines of businesses, including manufacturing, service industry, professional service areas and agricultural.  Commercial and industrial loans are generally secured with the assets of the company and/or the personal guarantee of the business owners.

Real estate construction loans are term loans to individuals, companies or developers used for the construction of a commercial or residential property for which repayment will be generated by the sale or permanent financing of the property.  Generally, these loans are for construction projects that have been either pre-sold, pre-leased, or have secured permanent financing, as well as loans to real estate companies with significant equity invested in the project.

Consumer loans include loans made to individuals not secured by real estate, including loans secured by automobiles or watercraft, and personal unsecured loans.

Concentrations of credit risk can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries or certain geographic regions. Credit risk associated with these concentrations could arise when a significant amount of loans or other financial instruments, related by similar characteristics, are simultaneously impacted by changes in economic or other conditions that cause their probability of repayment or other type of settlement to be adversely affected. Our uncovered loan portfolio is managed to a risk-appropriate level as to not create a collateral, industry or geographic concentration. As of September 30, 2015, we do not have any significant concentrations to any one particular industry or borrower. Our largest geographic concentration of loans is in the Detroit-Warren-Livonia metropolitan statistical area (“MSA”), which includes borrowers located in Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the state of Michigan.  Loans to borrowers in the Detroit-Warren-Livonia MSA totaled $1.5 billion, or approximately 32.7% of total loans, at September 30, 2015, of which approximately $126.9 million, or 8.3% of the total Detroit-Warren-Livonia MSA loans, were covered by loss share agreements with the FDIC. 

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The following tables detail our loan portfolio by loan type and geographic location as of September 30, 2015 and December 31, 2014. Geographic location is primarily determined by the domicile of the borrower and in some instances, the location of the collateral.

(Dollars in thousands)	Michigan		Ohio		Wisconsin		Illinois		Indiana		Nevada		Other		Total
September 30, 2015
Uncovered loans
Residential real estate (1)(2)	$	673,719	$	478,348	$	10,772	$	47,832	$	92,518	$	11,146	$	137,955	$	1,452,290
Commercial real estate (3)(4)	879,696		300,088		42,083		115,407		33,328		64,956		48,863		1,484,421
Commercial and industrial (5)	531,116		180,988		20,108		202,324		27,783		22,243		212,155		1,196,717
Real estate construction	110,758		62,077		8,913		15,171		14,160		2,235		3,721		217,035
Consumer	39,750		4,574		1,148		3,936		2,013		2,879		110,196		164,496
Total uncovered loans	2,235,039		1,026,075		83,024		384,670		169,802		103,459		512,890		4,514,959
Covered loans
Residential real estate (1)	68,267		280		19,710		956		1,158		—		—		90,371
Commercial real estate (3)	61,982		—		13,553		1,180		75		—		318		77,108
Commercial and industrial (5)	6,790		—		6,980		126		—		—		—		13,896
Real estate construction	2,029		—		2,532		588		—		—		—		5,149
Consumer	105		—		—		—		—		—		—		105
Total covered loans	139,173		280		42,775		2,850		1,233		—		318		186,629
Total loans	$	2,374,212	$	1,026,355	$	125,799	$	387,520	$	171,035	$	103,459	$	513,208	$	4,701,588

(1) Residential real estate loans to borrowers in the Detroit-Warren-Livonia MSA totaled $460.6 million of uncovered loans and $62.6 million of covered loans.  The Detroit-Warren-Livonia MSA includes borrowers located in Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the State of Michigan.

(2) Residential real estate loans to borrowers in the Cleveland-Elyria-Mentor metropolitan statistical area (Cleveland MSA) totaled $117.7 million of uncovered loans.  The Cleveland MSA includes borrowers located in Cuyahoga, Geauga, Lake, Lorain, and Medina counties in the State of Ohio.

(3) Commercial real estate loans to borrowers in the Detroit-Warren-Livonia MSA totaled $542.7 million of uncovered loans and $55.7 million of covered loans.

(4) Commercial real estate loans to borrowers in the Cleveland MSA totaled $197.1 million of uncovered loans.

(5) Commercial and industrial loans to borrowers in the Detroit-Warren-Livonia MSA totaled $306.2 million of uncovered loans and $6.5 million of covered loans. 

(Dollars in thousands)	Michigan		Ohio		Wisconsin		Illinois		Indiana		Nevada		Other		Total
December 31, 2014
Uncovered loans
Residential real estate (1)(2)	$	603,480	$	535,024	$	12,555	$	42,059	$	100,955	$	11,921	$	120,018	$	1,426,012
Commercial real estate (3)(4)	748,098		276,292		43,670		89,763		37,557		90,847		24,711		1,310,938
Commercial and industrial (5)	388,039		118,089		23,452		135,350		24,419		22,489		157,639		869,477
Real estate construction	63,042		19,279		8,897		17,151		16,317		4,402		2,598		131,686
Consumer	34,941		4,567		1,649		4,861		2,332		3,964		112,210		164,524
Total uncovered loans	1,837,600		953,251		90,223		289,184		181,580		133,623		417,176		3,902,637
Covered loans
Residential real estate (1)	82,399		280		22,984		1,005		1,461		97		—		108,226
Commercial real estate (3)	161,364		—		23,536		1,182		74		—		506		186,662
Commercial and industrial (5)	21,147		80		10,951		351		—		—		119		32,648
Real estate construction	4,689		—		3,913		787		—		—		—		9,389
Consumer	9,494		54		3		4		10		—		—		9,565
Total covered loans	279,093		414		61,387		3,329		1,545		97		625		346,490
Total loans	$	2,116,693	$	953,665	$	151,610	$	292,513	$	183,125	$	133,720	$	417,801	$	4,249,127

(1) Residential real estate loans to borrowers in the Detroit-Warren-Livonia MSA totaled $437.0 million of uncovered loans and $76.0 million of covered loans.  The Detroit-Warren-Livonia MSA includes borrowers located in Wayne, Oakland, Macomb, Livingston, St. Clair and Lapeer counties in the State of Michigan.

(2) Residential real estate loans to borrowers in the Cleveland-Elyria-Mentor metropolitan statistical area (Cleveland MSA) totaled $132.3 million of uncovered loans.  The Cleveland MSA includes borrowers located in Cuyahoga, Geauga, Lake, Lorain, and Medina counties in the State of Ohio.

(3) Commercial real estate loans to borrowers in the Detroit-Warren-Livonia MSA totaled $501.0 million of uncovered loans and $152.5 million of covered loans.

(4) Commercial real estate loans to borrowers in the Cleveland MSA totaled $183.9 million of uncovered loans.

(5) Commercial and industrial loans to borrowers in the Detroit-Warren-Livonia MSA totaled $257.0 million of uncovered loans and $19.2 million of covered loans. 

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The following table details our loan portfolio by loan type for the periods presented.

(Dollars in thousands)	September 30, 2015		December 31, 2014
Uncovered loans
Residential real estate	$	1,452,290	$	1,426,012
Commercial real estate
Non-owner occupied	988,635		888,650
Owner-occupied	472,269		417,843
Farmland	23,517		4,445
Total commercial real estate	1,484,421		1,310,938
Commercial and industrial	1,196,717		869,477
Real estate construction	217,035		131,686
Consumer	164,496		164,524
Total uncovered loans	4,514,959		3,902,637
Covered loans
Residential real estate	90,371		108,226
Commercial real estate
Non-owner occupied	40,777		108,692
Owner-occupied	32,009		70,492
Farmland	4,322		7,478
Total commercial real estate	77,108		186,662
Commercial and industrial	13,896		32,648
Real estate construction	5,149		9,389
Consumer	105		9,565
Total covered loans	186,629		346,490
Total loans	$	4,701,588	$	4,249,127

Total loans were $4.7 billion at September 30, 2015, an increase of $452.5 million from December 31, 2014. The increase in total loans of $452.5 million resulted from the acquisition of $162.3 million of loans at fair value in our acquisition of First of Huron Corp. on February 6, 2015 and $373.0 million of uncovered loan growth outside of the acquisition excluding loans we reclassified from covered to uncovered (discussed below), partially offset by $82.8 million in covered loan run-off also excluding the loans we reclassified from covered to uncovered. The first of our four non-single family FDIC loss sharing agreements expired effective July 1, 2015, resulting in $77.0 million of covered loans being reclassified to uncovered loans. The total increase in uncovered loans of $535.3 million at September 30, 2015, excluding the loans reclassified into uncovered loans, compared to December 31, 2014, represented increases in commercial and industrial loans of $319.1 million, commercial real estate loans of $114.9 million, real estate construction loans of $83.9 million and residential real estate loans of $25.7 million, partially offset by a decrease in consumer loans of $8.3 million. The covered loan run-off, excluding the loans reclassified from covered to uncovered, for the nine months ended September 30, 2015, resulted from decreases in commercial real estate loans of $51.0 million, or 27.3%, residential real estate loans of $17.2 million, or 15.9%, commercial and industrial loans of $10.6 million, or 32.6%, real estate construction loans of $2.8 million, or 29.4% and consumer loans of $1.2 million, or 12.8%. Long term, we expect to increase our concentration in commercial and industrial while decreasing our concentration in residential real estate, with a goal of our overall loan portfolio mix to be approximately one-third commercial and industrial loans, approximately one-third commercial real estate loans, and the remaining to be a mix of residential real estate and consumer loans.

We originate both fixed and adjustable rate residential real estate loans conforming to the underwriting guidelines of the Federal National Mortgage Association, the Government National Mortgage Association or the Federal Home Loan Mortgage Corporation, home equity loans and lines of credit that are secured by first or junior liens, and a limited amount of other secured high credit quality jumbo loans.  We have not originated or purchased a material amount of high-risk products, such as subprime, option adjustable rate or Alternative A-paper mortgage loans as of September 30, 2015.

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Residential real estate loans totaled $1.5 billion at September 30, 2015, of which $1.4 billion were uncovered and $90.4 million were covered. Of the $1.5 billion of residential real estate loans outstanding at September 30, 2015, $19.6 million (consisting of $17.6 million of uncovered loans and $2.0 million of covered loans) were on nonaccrual status. Included in residential real estate loans are $205.7 million of home equity loans and lines of credit (consisting of $161.7 million of uncovered loans and $44.0 million of covered loans) of which $73.6 million have interest only payment terms. These loans are generally secured by junior liens and represent interest only residential real estate loans that we held as of September 30, 2015. Also included in residential real estate loans are $220.3 million of uncovered jumbo adjustable rate mortgages and $9.7 million of residential real estate loans with balloon payment terms (consisting of $3.5 million of uncovered loans and $6.2 million of covered loans) of which $508 thousand were on nonaccrual status as of September 30, 2015.

Real estate construction loans totaled $222.2 million at September 30, 2015, of which $217.1 million were uncovered loans and $5.1 million were covered loans.  Of the $222.2 million of real estate construction loans outstanding at September 30, 2015, $569 thousand (consisting of $333 thousand of uncovered loans and $236 thousand of covered loans) were on nonaccrual status. Included in real estate construction loans are $1.6 million of covered loans with balloon payment terms and fully accruing interest as of September 30, 2015. As of September 30, 2015 there were no uncovered loans included in real estate construction with balloon payment terms or on nonaccrual status.

Loan Maturity/Rate Sensitivity

The following tables show the contractual maturities of our uncovered and covered loans for the periods presented.

	Loans Maturing
(Dollars in thousands)	One year or less		After one but within five years		After five years		Total
September 30, 2015
Uncovered loans:
Residential real estate	$	60,911	$	150,402	$	1,240,977	$	1,452,290
Commercial real estate	216,149		904,693		363,579		1,484,421
Commercial and industrial	243,631		780,364		172,722		1,196,717
Real estate construction	50,188		74,569		92,278		217,035
Consumer	99,503		8,037		56,956		164,496
Total uncovered loans	$	670,382	$	1,918,065	$	1,926,512	$	4,514,959
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			1,258,790		858,533
Floating interest rates			659,275		1,067,979
Total			$	1,918,065	$	1,926,512
Covered loans:
Residential real estate	$	11,137	$	32,685	$	46,549	$	90,371
Commercial real estate	31,586		38,627		6,895		77,108
Commercial and industrial	9,883		3,802		211		13,896
Real estate construction	2,201		2,440		508		5,149
Consumer	—		83		22		105
Total covered loans	$	54,807	$	77,637	$	54,185	$	186,629
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			71,639		19,449
Floating interest rates			5,998		34,736
Total			$	77,637	$	54,185

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	Loans Maturing
(Dollars in thousands)	One year or less		After one but within five years		After five years		Total
December 31, 2014
Uncovered loans:
Residential real estate	$	72,086	$	97,641	$	1,256,285	$	1,426,012
Commercial real estate	221,617		818,219		271,102		1,310,938
Commercial and industrial	208,568		502,798		158,111		869,477
Real estate construction	21,211		34,933		75,542		131,686
Consumer	3,399		52,986		108,139		164,524
Total uncovered loans	$	526,881	$	1,506,577	$	1,869,179	$	3,902,637
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			982,520		1,003,759
Floating interest rates			524,057		865,420
Total			$	1,506,577	$	1,869,179
Covered loans:
Residential real estate	$	9,056	$	44,691	$	54,479	$	108,226
Commercial real estate	101,226		63,945		21,491		186,662
Commercial and industrial	22,165		9,095		1,388		32,648
Real estate construction	6,579		2,181		629		9,389
Consumer	178		871		8,516		9,565
Total covered loans	$	139,204	$	120,783	$	86,503	$	346,490
Sensitivity of loans to changes in interest rates:
Predetermined (fixed) interest rates			112,362		44,806
Floating interest rates			8,421		41,697
Total			$	120,783	$	86,503

Allowance for Loan Losses

We maintain the allowance for loan losses at a level we believe is sufficient to absorb probable, incurred losses in our loan portfolio given the conditions at the time. Management determines the adequacy of the allowance based on periodic evaluations of the loan portfolio and other factors. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change. The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries or previous amounts charged-off.

Purchased Loans

We maintain an allowance for loan losses on purchased loans based on credit deterioration subsequent to the acquisition date.  In accordance with the accounting guidance for business combinations, there was no allowance brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date.  For purchased credit impaired loans, accounted for under FASB Topic ASC 310-30 “Receivables — Loans and Debt Securities Acquired with Deteriorated Credit Quality” (“ASC 310-30”) and troubled debt restructurings previously individually accounted for under ASC 310-30, management establishes an allowance for credit deterioration subsequent to the date of acquisition by re-estimating expected cash flows on a quarterly basis with any decline in expected cash flows recorded as provision for loan losses. Impairment is measured as the excess of the recorded investment in a loan over the present value of expected future cash flows discounted at the pre-impairment accounting yield of the loan.  For any increases in cash flows expected to be collected, we first reverse only previously recorded allowance for loan losses, then adjust the amount of accretable yield recognized on a prospective basis over the loan’s remaining life.  These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. For non-purchased credit impaired loans acquired in our acquisitions of First Place Bank, Talmer West Bank and First of

Huron Corp. that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced by First Place Bank, Talmer West Bank or First of Huron Corp. or Talmer Bank, following each respective merger,

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for loans with similar characteristics as those acquired other than purchased credit impaired loans.  We record an allowance for loan losses only when the calculated amount exceeds the estimated credit mark at acquisition that was established for the similar period covered in the allowance for loan loss calculation. For all other purchased loans accounted for under ASC 310-20 or under ASC 310-40, the allowance is calculated in accordance with the methods used to calculate the allowance for loan losses for originated loans.

Originated loans

The allowance for loan losses on originated loans represents management’s assessment of probable, incurred credit losses inherent in the loan portfolio. The allowance for loan losses consists of specific allowances, based on individual evaluation of certain loans, and allowances for homogeneous pools of loans with similar risk characteristics.

Impaired loans include loans placed on nonaccrual status and troubled debt restructurings. Loans are considered impaired when based on current information and events it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. When determining if we will be unable to collect all principal and interest payments due in accordance with the original contractual terms of the loan agreement, we consider the borrower’s overall financial condition, resources and payment record, support from guarantors, and the realizable value of any collateral.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All impaired loans are identified to be individually evaluated for impairment.  If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the discounted expected future cash flows or at the fair value of collateral if repayment is collateral dependent.

The allowance for our business loans, which includes commercial and industrial, commercial real estate and real estate construction loans, that are not individually evaluated for impairment begins with a process of estimating the probable incurred losses in the portfolio. These estimates are established based on our internal credit risk ratings and historical loss data. Internal credit risk ratings are assigned to each business loan at the time of approval and are subjected to subsequent periodic reviews by senior management, at least annually or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan. As our operating history is limited and we are growing rapidly, the historical loss estimates for loans are based primarily on the actual historical loss experienced by all banks in our markets of Michigan, Ohio, Wisconsin, Illinois and Nevada combined with a small factor representing our own loss history from the same time period.  These estimates are established by loan type including commercial and industrial, commercial real estate and real estate construction, and further segregated by region, including Michigan, Ohio, Wisconsin, Illinois and Nevada, where applicable. In addition, consideration is given to borrower rating migration experience and trends, industry concentrations and conditions, changes in collateral values of properties securing loans and trends with respect to past due and nonaccrual amounts. Given our limited operating history, the estimate of losses for single family residential and consumer loans which are not individually evaluated is also based primarily on historical loss rates experienced in the respective loan classes by all banks in Michigan, Ohio, Wisconsin, Illinois and Nevada. This estimate is also adjusted to give consideration to borrower rating migration experience and trends, changes in collateral values of properties securing loans and trends with respect to past due and nonaccrual amounts.

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The following tables present, by loan type, the changes in the allowance for loan losses on both uncovered and covered loans for the periods presented.

Analysis of the Allowance for Loan Losses — Uncovered

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Balance at beginning of period	$	36,566		$	24,360		$	33,819		$	17,746
Transfer in from covered (1)	3,579			—			3,579			—
Loan charge-offs:
Residential real estate	(836		)	(1,597		)	(4,054		)	(4,414		)
Commercial real estate	(864		)	(1,783		)	(5,411		)	(6,612		)
Commercial and industrial	(375		)	(826		)	(2,377		)	(1,452		)
Real estate construction	(57		)	(210		)	(364		)	(319		)
Consumer	(631		)	(55		)	(1,210		)	(179		)
Total loan charge-offs	(2,763		)	(4,471		)	(13,416		)	(12,976		)
Recoveries of loans previously charged-off:
Residential real estate	1,819			800			3,273			2,100
Commercial real estate	1,538			1,017			7,092			3,501
Commercial and industrial	195			79			1,741			680
Real estate construction	374			—			659			964
Consumer	106			323			186			450
Total loan recoveries	4,032			2,219			12,951			7,695
Net recoveries (charge-offs)	1,269			(2,252		)	(465		)	(5,281		)
Provision for loan losses	3,666			7,784			8,147			17,427
Balance at end of period	$	45,080		$	29,892		$	45,080		$	29,892
Allowance for loan losses as a percentage of total uncovered loans at period end	1.00		%	0.82		%	1.00		%	0.82		%
Annualized net loan (recoveries) charge-offs on uncovered loans as a percentage of average uncovered loans	(0.12		)%	0.26		%	0.01		%	0.22		%

(1) Effective July 1, 2015, the first of our four non-single family FDIC loss share agreements expired, therefore, the balance of the loans and the related allowance for losses covered under such agreement were reclassified from covered to uncovered.

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Analysis of the Allowance for Loan Losses — Covered

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Balance at beginning of period	$	16,340		$	32,743		$	21,353		$	40,381
Transfer out to uncovered (1)	(3,579		)	—			(3,579		)	—
Loan charge-offs:
Residential real estate	(218		)	(371		)	(694		)	(1,646		)
Commercial real estate	(861		)	(3,106		)	(5,449		)	(6,301		)
Commercial and industrial	(392		)	(565		)	(2,483		)	(3,092		)
Real estate construction	(3		)	(219		)	(965		)	(1,223		)
Consumer	—			(71		)	(165		)	(148		)
Total loan charge-offs	(1,474		)	(4,332		)	(9,756		)	(12,410		)
Recoveries of loans previously charged-off:
Residential real estate	167			558			607			1,666
Commercial real estate	985			1,585			9,776			7,500
Commercial and industrial	1,138			1,067			4,303			3,408
Real estate construction	29			352			533			1,069
Consumer	117			70			287			248
Total loan recoveries	2,436			3,632			15,506			13,891
Net recoveries (charge-offs)	962			(700		)	5,750			1,481
Benefit for loan losses	(2,966		)	(6,275		)	(12,767		)	(16,094		)
Balance at end of period	$	10,757		$	25,768		$	10,757		$	25,768
Allowance for loan losses as a percentage of total covered loans at period end	5.76		%	6.38		%	5.76		%	6.38		%
Annualized net loan (recoveries) charge-offs on covered loans as a percentage of average covered loans	(2.05		)%	0.64		%	(2.81		)%	(0.41		)%

(1) Effective July 1, 2015, the first of our four non-single family FDIC loss share agreements expired, therefore, the balance of the loans and the related allowance for losses covered under such agreement were reclassified from covered to uncovered.

Our uncovered allowance for loan losses was $45.1 million, or 1.00% of uncovered loans, at September 30, 2015, compared to $33.8 million, or 0.87% of uncovered loans, at December 31, 2014. The $11.3 million increase in the uncovered allowance for loan losses during the nine months ended September 30, 2015 was primarily due to additional allowance resulting from our quarterly re-estimation of expected cash flows for our uncovered purchased credit impaired loans, the impact of organic loan growth and allowance related to the loans transferred from covered to uncovered due to the expiration of the first of our four non-single family FDIC loss share agreements.

The covered allowance for loan losses was $10.8 million, or 5.76% of covered loans, at September 30, 2015, compared to $21.4 million, or 6.16% of total covered loans, at December 31, 2014. The $10.6 million decrease in the covered allowance for loan losses during the nine months ended September 30, 2015 was primarily driven by payments received on covered loans previously carrying an allowance for loan loss or previously charged off and allowance related to the loans transferred from covered to uncovered due to the expiration of the first of our four non-single family FDIC loss share agreements, partially offset by the additional allowance resulting from our quarterly re-estimation of expected cash flows on our covered purchased credit impaired loans.

The following tables present, by loan type, the allocation of the allowance for loan losses on both uncovered and covered loans for the periods presented.

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Allocation of the Allowance for Loan Losses — Uncovered

	Accounted for under ASC 310-30						Excluded from ASC 310-30 accounting
(Dollars in thousands)	Allocated Allowance		Allowance Ratio (1)		Percent of loans in each category to total loans		Allocated Allowance		Allowance Ratio (1)		Percent of loans in each category to total loans
September 30, 2015
Balance at end of period applicable to:
Residential real estate	$	5,138	2.38	%	46.5	%	$	6,687	0.54	%	30.5	%
Commercial real estate	8,863		4.21		45.4		7,106		0.56		31.5
Commercial and industrial	1,000		4.83		4.5		13,204		1.12		29.0
Real estate construction	1,330		19.42		1.5		814		0.39		5.2
Consumer	100		1.03		2.1		838		0.54		3.8
Total uncovered loans	$	16,431	3.54	%	100.0	%	$	28,649	0.71	%	100.0	%
December 31, 2014
Balance at end of period applicable to:
Residential real estate	$	6,233	2.60	%	52.6	%	$	5,960	0.50	%	34.4	%
Commercial real estate	5,229		2.75		41.7		5,899		0.53		32.5
Commercial and industrial	885		5.71		3.4		6,950		0.81		24.8
Real estate construction	950		11.43		1.8		649		0.53		3.6
Consumer	162		6.78		0.5		902		0.56		4.7
Total uncovered loans	$	13,459	2.95	%	100.0	%	$	20,360	0.59	%	100.0	%

(1) Allocated allowance as a percentage of related loans outstanding.

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Allocation of the Allowance for Loan Losses — Covered

(Dollars in thousands)	Allocated Allowance		Allowance Ratio (1)		Percent of loans in each category to total loans
September 30, 2015
Balance at end of period applicable to:
Residential real estate	$	3,773	4.18	%	48.4	%
Commercial real estate	5,099		6.61		41.3
Commercial and industrial	1,309		9.42		7.4
Real estate construction	572		11.11		2.8
Consumer	4		3.81		0.1
Total covered loans	$	10,757	5.76	%	100.0	%
December 31, 2014
Balance at end of period applicable to:
Residential real estate	$	3,981	3.68	%	31.2	%
Commercial real estate	13,663		7.32		53.9
Commercial and industrial	2,577		7.89		9.4
Real estate construction	1,086		11.57		2.7
Consumer	46		0.48		2.8
Total covered loans	$	21,353	6.16	%	100.0	%

(1) Allocated allowance as a percentage of related loans outstanding.

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Summary of Impaired Assets and Past Due Loans

(Dollars in thousands)	September 30, 2015		December 31, 2014
Uncovered
Nonperforming troubled debt restructurings
Residential real estate	$	4,600	$	3,984
Commercial real estate	5,519		2,644
Commercial and industrial	705		180
Real estate construction	135		—
Consumer	115		83
Total nonperforming troubled debt restructurings	11,074		6,891
Nonaccrual loans other than nonperforming troubled debt restructurings
Residential real estate	$	12,962	$	13,390
Commercial real estate	12,421		11,112
Commercial and industrial	9,236		3,370
Real estate construction	198		174
Consumer	149		174
Total nonaccrual loans other than nonperforming troubled debt restructurings	34,966		28,220
Total nonaccrual loans	46,040		35,111
Other real estate and repossessed assets (1)	27,329		36,872
Total nonperforming assets	73,369		71,983
Performing troubled debt restructurings
Residential real estate	2,402		1,368
Commercial real estate	13,973		3,785
Commercial and industrial	3,433		840
Real estate construction	197		90
Consumer	235		234
Total performing troubled debt restructurings	20,240		6,317
Total uncovered impaired assets	$	93,609	$	78,300
Loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	196	$	53

(1) Excludes closed branches and operating facilities.

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(Dollars in thousands)	September 30, 2015		December 31, 2014
Covered
Nonperforming troubled debt restructurings
Residential real estate	$	1,618	$	1,363
Commercial real estate	3,590		14,343
Commercial and industrial	1,045		2,043
Real estate construction	210		272
Consumer	2		13
Total nonperforming troubled debt restructurings	6,465		18,034
Nonaccrual loans other than nonperforming troubled debt restructurings
Residential real estate	$	392	$	485
Commercial real estate	190		1,380
Commercial and industrial	633		1,517
Real estate construction	26		441
Total nonaccrual loans other than nonperforming troubled debt restructurings	1,241		3,823
Total nonaccrual loans	7,706		21,857
Other real estate and repossessed assets	5,621		10,719
Total nonperforming assets	13,327		32,576
Performing troubled debt restructurings
Residential real estate	3,185		3,046
Commercial real estate	1,709		9,017
Commercial and industrial	204		1,137
Real estate construction	298		264
Total performing troubled debt restructurings	5,396		13,464
Total covered impaired assets	$	18,723	$	46,040
Loans 90 days or more past due and still accruing, excluding loans accounted for under ASC 310-30	$	—	$	—

Nonperforming assets consist of nonaccrual loans, other real estate owned, excluding closed branches and operating facilities, and repossessed assets. We do not consider performing TDRs to be nonperforming assets. The level of nonaccrual loans is an important element in assessing asset quality. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is doubtful. Generally, loans are placed on nonaccrual status due to the continued failure by the borrower to adhere to contractual payment terms coupled with other pertinent factors, such as insufficient collateral value.

Purchased credit impaired loans accounted for under ASC 310-30 are classified as performing, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the quarterly re-estimation of expected cash flows and is included in the resulting recognition of current period covered loan loss provision or future period yield adjustments.

Total nonperforming assets were $86.7 million as of September 30, 2015, compared to $104.6 million as of December 31, 2014. The $17.9 million decrease in total nonperforming assets was primarily due to sales of other real estate owned occurring during the period.

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FDIC Indemnification Asset and Receivable

In connection with our FDIC-assisted acquisitions, we entered into loss share agreements with the FDIC.  At each acquisition date, we account for amounts receivable from the FDIC under the loss share agreements as an indemnification asset. Subsequent to initial recognition, the FDIC indemnification asset is reviewed quarterly and adjusted for any changes in expected cash flows. These adjustments are measured on the same basis as the related covered assets.  A decline in expected cash flows on covered loans is referred to as impairment and recorded as provision for loan losses, resulting in an increase to the allowance for loan losses on covered loans. Estimated reimbursements due from the FDIC under loss share agreements related to any declines in expected cash flows are recorded as noninterest income in “FDIC loss sharing income” in our consolidated statements of income and result in an increase to the FDIC indemnification asset in the same period.  An improvement in expected cash flows on covered loans, once any previously recorded impairment is recaptured, is recognized prospectively as an upward adjustment to the yield on the related covered loan and a downward adjustment to the yield on the FDIC indemnification asset. As such, overall improvements in expected cash flows on covered loans can result in a negative yield on the FDIC indemnification asset, which is recorded in “interest income” in our consolidated statements of income, while increases to the FDIC indemnification asset are recorded as adjustments to noninterest income in “FDIC loss sharing income” in our consolidated statements of income.  When covered loans payoff sooner than expected, any remaining FDIC indemnification asset is reviewed and may result in a direct write off as an adjustment to  noninterest income in “Accelerated discount on acquired loans” in our consolidated statements of income. The FDIC indemnification asset is also reduced for claims submitted to the FDIC for reimbursement.  We have established an FDIC receivable which represents claims submitted to the FDIC for reimbursement for which we expect to receive payment within 90 days.

Our loss share agreements for CF Bancorp, First Banking Center and Peoples State Bank include provisions where a clawback payment, calculated using formulas included within the agreements, is to be made to the FDIC ten years and 45 days following the acquisition in the event actual losses fail to reach stated levels. As of September 30, 2015, the estimated FDIC clawback liability totaled $27.3 million, including $24.6 million and $2.7 million related to the CF Bancorp and First Banking Center acquisitions, respectively.

The FDIC indemnification asset balance was $30.6 million at September 30, 2015. Of this amount, we expect approximately $16.5 million to be collected from the FDIC and the remaining $14.1 million to be amortized prior to the end of the associated loss share agreement, as a result of improvements in cash flow expectations on covered loans. Effective July 1, 2015, the first of our four non-single family FDIC loss share agreements expired. The second of our non-single family FDIC loss share agreements expires effective January 1, 2016, of which the FDIC indemnification asset included $1.5 million related to covered loans and covered other real estate related to this agreement as of September 30, 2015. Any losses on covered assets after the applicable loss share agreement expires will not be eligible for reimbursement from the FDIC. As such, to the extent that loss share coverage ends prior to the loss triggering event on a covered asset, impairment on any remaining FDIC indemnification asset associated with the covered asset would be required. Management is closely monitoring the outcome of anticipated losses on covered assets and has proactively reviewed the portfolios of covered loans and other real estate that are under loss share agreements to evaluate the appropriateness of the associated remaining FDIC indemnification asset.

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The following table summarizes the activity related to the FDIC indemnification asset and the FDIC receivable for the periods indicated.

	For the three months ended  September 30, 2015						For the nine months ended September 30, 2015
(Dollars in thousands)	FDIC Indemnification Asset			FDIC Receivable			FDIC Indemnification Asset			FDIC Receivable
Balance at beginning of period	$	36,997		$	5,543		$	67,026		$	6,062
Accretion	(4,366		)	—			(22,164		)	—
Sales and write-downs of other real estate owned (covered)	(17		)	(511		)	(845		)	(495		)
Net effect of change in allowance on covered assets (1)	(1,095		)	—			(2,295		)	—
Reimbursements requested from FDIC (reclassification to FDIC receivable)	(968		)	968			(11,171		)	11,171
Decreases due to recoveries net of additional claimable expenses incurred (2)	—			(2,794		)	—			(10,412		)
Claim payments received from the FDIC	—			(588		)	—			(3,708		)
Balance at end of period	$	30,551		$	2,618		$	30,551		$	2,618

(1) Primarily includes adjustments for fully claimed and exited loans and the results of re-estimations of expected cash flows under ASC 310-30 accounting.

(2) Includes expenses associated with maintaining the underlying properties and legal fees.

	For the three months ended  September 30, 2014						For the nine months ended September 30, 2014
(Dollars in thousands)	FDIC Indemnification Asset			FDIC Receivable			FDIC Indemnification Asset			FDIC Receivable
Balance at beginning of period	$	102,694		$	7,198		$	131,861		$	7,783
Accretion	(6,663		)	—			(18,887		)	—
Sales and write-downs of other real estate owned (covered)	(88		)	233			(841		)	(14		)
Net effect of change in allowance on covered assets (1)	(5,484		)	—			(13,639		)	—
Reimbursements requested from FDIC (reclassification to FDIC receivable)	(8,018		)	8,018			(16,053		)	16,053
Decreases due to recoveries net of additional claimable expenses incurred (2)	—			(269		)	—			(4,588		)
Claim payments received from the FDIC	—			(2,307		)	—			(6,361		)
Balance at end of period	$	82,441		$	12,873		$	82,441		$	12,873

(1) Primarily includes adjustments for fully claimed and exited loans and the results of re-estimations of expected cash flows under ASC 310-30 accounting.

(2) Includes expenses associated with maintaining the underlying properties and legal fees.

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Investment Securities

	September 30,		December 31,
(Dollars in thousands)	2015		2014
Securities available-for-sale:
U.S. government sponsored agency obligations	$	99,100	$	98,358
Obligations of state and political subdivisions:
Taxable	318		397
Tax exempt	277,731		232,259
Small Business Administration (SBA) Pools	30,413		33,933
Residential mortgage-backed securities:
Issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored enterprises	307,355		291,759
Privately issued	58,197		18,800
Privately issued commercial mortgage backed securities	19,142		5,130
Corporate debt securities:
Senior debt	67,573		39,513
Subordinated debt	20,876		20,670
Total securities available-for-sale	$	880,705	$	740,819
Securities held-to-maturity (1)	1,678		1,226
Total investment securities	$	882,383	$	742,045

(1) Included within “Other assets” in the Consolidated Balance Sheet.

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for both normal operations and potential acquisitions while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral. At September 30, 2015, total investment securities were $882.4 million, or 13.6% of total assets, compared to $742.0 million, or 12.6% of total assets, at December 31, 2014. The increase from December 31, 2014 to September 30, 2015, primarily reflected increases in a diverse mix of residential mortgage-backed securities, tax exempt obligations of state and political subdivisions, corporate debt securities and privately issued commercial mortgage backed securities reflecting management's decision to invest liquid assets while retaining accessibility to the funds for potential liquidity needs. Securities with a carrying value of $396.7 million and $337.8 million were pledged at September 30, 2015 and December 31, 2014, respectively, to secure borrowings and deposits.

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 The following tables show maturities and yields for the investment securities portfolio at September 30, 2015 and December 31, 2014.

	Maturity as of September 30, 2015
	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
(Dollars in thousands)	Cost		Yield (1)		Cost		Yield (1)		Cost		Yield (1)		Cost		Yield (1)
Securities available-for-sale:
U.S. government sponsored agency obligations (1)	$	—	—	%	$	44,730	1.85	%	$	51,403	2.36	%	$	1,772	3.28	%
Obligations of state and political subdivisions:
Taxable	—		—		318		6.19		—		—		—		—
Tax exempt (2)	4,037		4.16		47,756		3.80		126,514		4.19		95,820		4.44
SBA Pools (3) (4)	—		—		1,404		1.31		28,480		0.84		—		—
Residential mortgage-backed securities (3):
Issued and/or guaranteed by U.S. government agencies or sponsored enterprises	2,566		2.59		258,907		2.49		41,735		2.61		—		—
Privately issued (1)	91		(0.24	)	49,223		2.60		9,014		2.54		—		—
Commercial mortgage-backed securities (3)	14,137		2.21		5,085		2.19		—		—		—		—
Corporate debt securities (5)	3,049		1.61		55,377		2.14		17,874		4.00		11,900		1.60
Total securities available-for-sale	23,880		2.50		462,800		2.53		275,020		3.19		109,492		4.11
Securities held-to-maturity	—		—		1,678		—		—		—		—		—
Total investment securities	$	23,880	2.50	%	$	464,478	2.52	%	$	275,020	3.19	%	$	109,492	4.11	%

(1) Average yields assume a yield to call approach where embedded call options exist, such as in certain callable U.S. government sponsored agency obligations and non-agency MBS’s. $38.7 million of U.S. government sponsored agency obligations maturing beyond five years contain step-up coupon structures which, if were not to be called prior to stated maturities, would positively impact average yields for balances maturing in the five-to-ten years bucket and after ten years bucket by 59 basis points and 122 basis points, respectively, or resulting in average yields of 2.95% and 4.50%, respectively.

(2) Average yields on tax-exempt obligations have been computed on a tax equivalent basis, based on a 35% federal tax rate.

(3) Maturity distributions for SBA pools, residential mortgage-backed securities and commercial mortgage backed securities are based on estimated average lives.

(4) All indicated balances in the one-to-five years bucket and five-to-ten years bucket encompass floating rate holdings indexed to Prime, which are contractually adjustable on a quarterly basis, in which the current September 30, 2015 indexed coupon rates are assumed to remain constant until maturity.

(5) Average yields on corporate debt securities in the one-to-five year maturity bucket, five-to-ten year maturity bucket, and after ten year maturity bucket includes yields on $5.9 million, $2.3 million and $11.9 million, respectively, of floating rate holdings indexed to 3-month LIBOR, in which the current September 30, 2015 indexed coupon rates are assumed to remain constant until maturity.

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	Maturity as of December 31, 2014
	One Year or Less				One to Five Years				Five to Ten Years				After Ten Years
	Amortized		Average		Amortized		Average		Amortized		Average		Amortized		Average
(Dollars in thousands)	Cost		Yield (1)		Cost		Yield (1)		Cost		Yield (1)		Cost		Yield (1)
Securities available-for-sale:
U.S. government sponsored agency obligations (1)	$	—	—	%	$	10,000	1.65	%	$	60,995	1.88	%	$	26,751	1.15	%
Obligations of state and political subdivisions:
Taxable	—		—		397		6.19		—		—		—		—
Tax exempt (2)	76		2.28		42,357		3.88		120,881		4.39		66,090		4.72
SBA Pools (3) (4)	—		—		1,650		1.06		32,174		0.87		—		—
Residential mortgage-backed securities (3):
Issued and/or guaranteed by U.S. government agencies or sponsored enterprises	6,268		2.73		234,666		2.42		48,222		2.44		—		—
Privately issued (1)	1,106		2.45		17,708		2.37		—		—		—		—
Commercial mortgage-backed securities (3)	—		—		5,127		2.19		—		—		—		—
Corporate debt securities (5)	1,752		1.54		36,667		1.94		10,000		5.00		11,787		2.23
Total securities available-for-sale	9,202		2.47		348,572		2.52		272,272		3.09		104,628		3.53
Securities held-to-maturity	—		—		1,226		—		—		—		—		—
Total investment securities	$	9,202	2.47	%	$	349,798	2.51	%	$	272,272	3.09	%	$	104,628	3.53	%

(1) Average yields assume a yield to call approach where embedded call options exist, such as in certain callable U.S. government sponsored agency obligations and non-agency MBS’s. $73.6 million of U.S. government sponsored agency obligations maturing beyond five years contain step-up coupon structures which, if were not to be called prior to stated maturities, would positively impact average yields for balances maturing in the five-to-ten years bucket and after ten years bucket by 79 basis points and 200 basis points, respectively, or resulting in average yields of 2.67% and 3.15%, respectively.

(2) Average yields on tax-exempt obligations have been computed on a tax equivalent basis, based on a 35% federal tax rate.

(3) Maturity distributions for SBA pools, residential mortgage-backed securities and commercial mortgage backed securities are based on estimated average lives.

(4) All indicated balances in the one-to-five years bucket and five-to-ten years bucket encompass floating rate holdings indexed to Prime, which are contractually adjustable on a quarterly basis, in which the current December 31, 2014 indexed coupon rates are assumed to remain constant until maturity.

(5) Average yields on corporate debt securities in the one-to-five year maturity bucket and after ten year maturity bucket includes yields on $5.9 million and $11.8 million, respectively, of floating rate holdings indexed to 3-month LIBOR, in which the current December 31, 2014 indexed coupon rates are assumed to remain constant until maturity.

Loan servicing rights

Loan servicing rights are created as a result of our mortgage banking origination activities, the purchase of mortgage servicing rights, the origination and purchase of commercial real estate servicing rights and the origination and purchase of agricultural servicing rights. Loans serviced for others are not reported as assets in our Consolidated Balance Sheets. As of September 30, 2015, we serviced loans for others with an aggregate outstanding principal balance of $6.0 billion.

Total loan servicing rights were $55.8 million as of September 30, 2015, compared to $70.6 million as of December 31, 2014. The $14.8 million decrease was primarily due to the sale of $12.7 million of mortgage servicing rights and $10.7 million of change in the fair value of loan servicing rights from December 31, 2014 to September 30, 2015 due to a combination of changes in market interest rates and reduced fair value due to loans paid off, partially offset by $8.6 million of loan servicing rights added to the portfolio. The sale of mortgage servicing rights included substantially all of the mortgage servicing rights we had owned for mortgages located outside of our primary target markets. Management has made the strategic decision not to hedge loan servicing assets at this point. Therefore, any future declines in interest rates would likely

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cause further decreases in the fair value of the loan servicing rights, and a corresponding detriment to earnings, whereas increases in interest rates would result in increases in fair value, and a corresponding benefit to earnings. Management may choose to hedge the loan servicing assets in the future.

Deposits

(Dollars in thousands)	September 30, 2015		December 31, 2014
Noninterest-bearing demand deposits	$	1,050,375	$	887,567
Interest-bearing demand deposits	813,609		660,697
Money market and savings deposits	1,314,798		1,170,236
Time deposits	1,611,315		1,188,178
Other brokered funds	335,354		642,185
Total deposits	$	5,125,451	$	4,548,863

Total deposits were $5.1 billion at September 30, 2015 and $4.5 billion at December 31, 2014, representing 88.5% and 89.0% of total liabilities at each period end, respectively. The fair value of deposits acquired in our acquisition of First of Huron Corp. totaled $201.5 million consisting of demand deposits of $91.1 million, money market and savings deposits of $62.4 million and time deposits of $48.0 million. Deposit growth outside of the acquisition of First of Huron Corp. was $375.1 million. The growth in deposits, excluding the fair value of deposits acquired in our acquisition of First of Huron Corp. was primarily due to increases of $375.1 million in time deposits, $224.6 million in demand deposits and $82.2 million in money market and savings deposits, partially offset by a decrease in other brokered funds of $306.8 million. Our interest-bearing deposit costs were 38 basis points and 27 basis points for the nine months ended September 30, 2015 and 2014, respectively.

The following table shows the contractual maturity of time deposits, including CDARs and IRA deposits and other brokered funds, of $100 thousand and over that were outstanding for the periods presented.

(Dollars in thousands)	September 30, 2015		December 31, 2014
Maturing in
3 months or less	$	293,194	$	180,288
3 months to 6 months	249,878		157,599
6 months to 1 year	402,559		201,234
1 year or greater	150,102		154,046
Total	$	1,095,733	$	693,167

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Borrowings

(Dollars in thousands)	September 30, 2015		December 31, 2014
Short-term borrowings:
FHLB advances	50,000		110,000
Securities sold under agreements to repurchase	22,090		25,743
Holding company line of credit	30,000		—
Total short-term borrowings	102,090		135,743
Long-term debt:
FHLB advances (1)	414,405		286,804
Securities sold under agreements to repurchase (2)	55,212		56,444
Subordinated notes related to trust preferred securities (3)	15,364		10,724
Total long-term debt	484,981		353,972
Total short-term borrowings and long-term debt:	$	587,071	$	489,715

(1) The September 30, 2015 balance includes advances payable of $409.5 million and purchase accounting premiums of $4.9 million. The December 31, 2014 balance includes advances payable of $280.1 million and purchase accounting premiums of $6.7 million.

(2) The September 30, 2015 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $5.2 million. The December 31, 2014 balance includes securities sold under agreements to repurchase of $50.0 million and purchase accounting premiums of $6.4 million.

(3) The September 30, 2015 balance includes subordinated notes related to trust preferred securities of $20.0 million and purchase accounting discounts of $4.6 million.  The December 31, 2014 balance includes subordinated notes related to trust preferred securities of $15.0 million and purchase accounting discounts of $4.3 million.

Total short-term borrowings and long-term debt outstanding at September 30, 2015 was $587.1 million, an increase of $97.4 million from $489.7 million at December 31, 2014. The increase in total borrowings was primarily due to an increase of $67.6 million in FHLB advances. In addition, we drew $30.0 million on our line of credit in the nine months ended September 30, 2015 to facilitate the repurchase of 2.5 million warrants to purchase shares of our Class A common stock with an aggregate purchase price of $19.9 million and for working capital.

Total debt was collateralized by $2.1 billion of commercial and mortgage loans, mortgage-backed securities and bonds at September 30, 2015, compared to $2.4 billion of commercial and mortgage loans, mortgage-backed securities and bonds at December 31, 2014. See the “Contractual Obligations” section of this financial review for maturity information.

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Capital Resources

The following table summarizes the changes in our shareholders’ equity for the periods indicated:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2015			2014			2015			2014
Balance at beginning of period	$	766,406		$	727,945		$	761,607		$	617,015
Net income	20,035			19,515			47,016			78,348
Other comprehensive income (loss)	3,566			(146		)	1,952			10,083
Stock-based compensation expense	515			343			1,381			798
Restricted stock awards, including tax benefit	—			—			16			—
Issuance of common shares, including tax benefit	(55		)	(301		)	(198		)	41,112
Repurchase of warrants to purchase 2.5 million shares, at fair value	—			—			(19,892		)	—
Repurchase of 5.1 million shares	(74,987		)	—			(74,987		)	—
Cash dividends paid on common stock (1)	(712		)	(704		)	(2,127		)	(704		)
Balance at end of period	$	714,768		$	746,652		$	714,768		$	746,652

(1) The Company declared common stock cash dividends of $0.01 in each of the first, second and third quarters of 2015 and the third quarter of 2014.

On February 17, 2015, we repurchased an aggregate of 2,529,416 warrants to repurchase shares of our Class A common stock issued to WLR Recovery Fund IV, L.P. and WLR IV Parallel ESC, L.P. (the “WL Ross Funds”). The purchase price, determined utilizing the closing price of our stock on the date of repurchase, was $19.9 million and was funded by a draw on our line of credit.

On August 31, 2015, we repurchased 5,077,000 shares of our Class A common stock sold by the WL Ross Funds in a secondary public offering. The purchase price in the offering was $14.77 per share, totaling $75.0 million. The shares were immediately retired following the purchase.

We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize shareholder value. We assess capital adequacy against the risk inherent in our balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.

At September 30, 2015, the most recent regulatory notifications categorized Talmer Bank as well capitalized under the regulatory framework for prompt corrective action.

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Financial institution regulators have established guidelines for minimum capital ratios for banks, thrifts and bank holding companies. During the first quarter of 2015, we adopted the new Basel III regulatory capital framework as approved by federal banking agencies, which are subject to a multi-year phase-in period. The adoption of this new framework modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. In addition, Basel III establishes a new capital conservation buffer of 2.5% of risk-weighted assets, which is phased-in over a four-year period beginning January 1, 2016. Our capital ratios exceeded the current well capitalized regulatory requirements as follows: 

	Well Capitalized Regulatory Requirement		Capital Ratio
September 30, 2015 (Basel III Transitional)
Total risk-based capital
Consolidated	N/A		13.2	%
Talmer Bank and Trust	10.0	%	13.6
Common equity tier 1 capital
Consolidated	N/A		12.1
Talmer Bank and Trust	6.5		12.5
Tier 1 risk-based capital
Consolidated	N/A		12.1
Talmer Bank and Trust	8.0		12.5
Tier 1 leverage ratio
Consolidated	N/A		10.2
Talmer Bank and Trust	5.0		11.3
December 31, 2014 (Basel I)
Total risk-based capital
Consolidated	N/A		16.4	%
Talmer Bank and Trust	10.0	%	16.3
Talmer West Bank (1)	N/A		19.6
Tier 1 risk-based capital
Consolidated	N/A		15.2
Talmer Bank and Trust	6.0		15.0
Talmer West Bank (1)	N/A		18.4
Tier 1 leverage ratio
Consolidated	N/A		11.6
Talmer Bank and Trust	5.0		11.6
Talmer West Bank (1)	N/A		12.4

(1) Notwithstanding its capital levels, Talmer West Bank was not categorized as well capitalized because it was subject to a Consent Order. Effective August 21, 2015, Talmer West Bank was merged with and into Talmer Bank and Trust.

We declared a cash dividend on our Class A common stock of $0.01 per share on October 28, 2015. The dividend will be paid out on November 20, 2015, to our Class A common shareholders of record as of November 9, 2015.

Off-Balance Sheet Arrangements

In the normal course of business, we offer a variety of financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include outstanding commitments to extend credit, credit lines, commercial letters of credit and standby letters of credit.

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Our exposure to credit loss, in the event of nonperformance by the counterparty to the financial instrument, is represented by the contractual amounts of those instruments. The same credit policies are used in making commitments and conditional obligations as are used for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer provided there is no violation of any condition established in the commitment. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on an individual basis. The amount of collateral obtained, if deemed necessary by us upon extension of credit, is based on management’s credit evaluation of the counterparty. The collateral held varies, but may include securities, real estate, inventory, plant, or equipment. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are included in commitments to extend credit. These lines of credit are generally uncollateralized, usually do not contain a specified maturity date and may be drawn upon only to the total extent to which we are committed.

Letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. Our portfolio of standby letters of credit consists primarily of performance assurances made on behalf of customers who have a contractual commitment to produce or deliver goods or services. The risk to us arises from our obligation to make payment in the event of the customers’ contractual default to produce the contracted good or service to a third party. Management conducts regular reviews of these instruments on an individual customer basis and does not anticipate any material losses as a result of these letters of credit.

We maintain an allowance to cover probable losses inherent in our financial instruments with off-balance sheet risk. At September 30, 2015 and December 31, 2014, the allowance for off-balance sheet risk was $815 thousand and $539 thousand, respectively, and included in “Other liabilities” on our consolidated balance sheets.

A summary of the contractual amounts of our exposure to off-balance sheet risk is as follows.

	September 30, 2015						December 31, 2014
(Dollars in thousands)	Fixed Rate		Variable Rate		Total		Fixed Rate		Variable Rate		Total
Commitments to extend credit	$	578,956	$	625,114	$	1,204,070	$	502,762	$	463,362	$	966,124
Standby letters of credit	63,979		3,526		67,505		69,305		4,197		73,502
Total commitments	$	642,935	$	628,640	$	1,271,575	$	572,067	$	467,559	$	1,039,626

We enter into forward commitments for the future delivery of mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitments to fund the loans.  These commitments to fund mortgage loans (interest rate lock commitments) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.

We also enter into interest rate derivatives to provide a service to certain qualifying customers to help facilitate their respective risk management strategies (“customer-initiated derivatives”).  These derivatives are not used to manage interest rate risk in our assets or liabilities.  We generally take offsetting positions with dealer counterparts to mitigate the inherent risk in these derivatives.

We additionally utilize interest rate swaps designated as cash flow hedges for risk management purposes to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates.  These interest rate swaps designated as cash flow hedges are used to manage differences in the amount, timing and duration of our known or expected cash receipts and our known or expected cash payments principally related to certain variable rate borrowings and/or deposits.

The agreements with our derivative counterparties contain a provision where, if we default on any of our indebtedness, then we could also be declared in default on our derivative obligations.  In addition, these agreements contain a provision where, if we fail to maintain our status as a well-capitalized institution, then the counterparty could terminate the derivative positions and we would be required to settle our obligations under the agreements. As of September 30, 2015, the fair value of derivatives in a net liability position, which includes accrued interest, but excludes any adjustment for nonperformance risk, related to these agreements was $7.4 million.

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The following table reflects the amount and fair value of our derivatives.

	September 30, 2015						December 31, 2014
			Fair Value						Fair Value
(Dollars in thousands)	Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)		Notional Amount (1)		Gross Derivative Assets (2)		Gross Derivative Liabilities (2)
Risk management purposes:
Derivatives designated as hedging instruments:
Interest rate swaps	$	22,000	$	—	$	586	$	12,000	$	—	$	222
Total risk management purposes	22,000		—		586		12,000		—		222
Customer-initiated and mortgage banking activities:
Forward contracts related to mortgage loans to be delivered for sale	165,899		—		1,082		114,828		—		803
Interest rate lock commitments	112,057		2,740		—		67,817		1,489		—
Customer-initiated derivatives	317,773		5,650		5,684		125,356		1,588		1,477
Total customer-initiated and mortgage banking activities	595,729		8,390		6,766		308,001		3,077		2,280
Total gross derivatives	$	617,729	$	8,390	$	7,352	$	320,001	$	3,077	$	2,502

(1) Notional or contract amounts, which represent the extent of involvement in the derivatives market, are used to determine the contractual cash flows required in accordance with the terms of the agreement.  These amounts are typically not exchanged, significantly exceed amounts subject to credit or market risk and are not reflected in our Consolidated Balance Sheets.

(2) Derivative assets are included within “Other assets” and derivative liabilities are included within “Other liabilities” on our Consolidated Balance Sheets.  Included in the fair value of the derivative assets are credit valuation adjustments for counterparty credit risk totaling $260 thousand at September 30, 2015 and $103 thousand at December 31, 2014.

Note 11, “Derivative Instruments,” to our consolidated financial statements includes additional information about these derivative contracts.

In connection with our mortgage banking loan sales, we make certain representations and warranties that the loans meet certain criteria, such as collateral type and underwriting standards.  We may be required to repurchase individual loans and/or indemnify the purchaser against losses if the loan fails to meet established criteria.  The following table represents the activity related to our liability recorded in connection with these representations and warranties.

	For the nine months ended September 30,
(Dollars in thousands)	2015			2014
Reserve balance at beginning of period	$	4,000		$	4,450
Addition of fair value of representations and warranties due to acquisition	—			500
Provision	(649		)	1,270
Charge-offs	(1,551		)	(2,220		)
Ending reserve balance	$	1,800		$	4,000
Reserve balance	September 30, 2015			December 31, 2014
Liability for specific claims	$	359		$	2,431
General allowance	1,441			1,569
Total reserve balance	$	1,800		$	4,000

The liability for specific claims includes liability for the estimated likelihood of payment of the claims while the general allowance is developed using a model to estimate the unknown liability including inputs such as the loans sold by year,

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the number and dollar amount of claims to-date by year, the rate of claims being rescinded and the estimate of the amount of the loss as a percent of the loan balance.

Contractual Obligations

In the normal course of business, we have various outstanding contractual obligations that will require future cash outflows.  The following table represents the largest contractual obligations as of September 30, 2015.

(Dollars in thousands)	Total		Less than 1 year		1 to 3 years		3 to 5 years		More than 5 years
Future minimum lease payments (1)	$	29,974	$	5,874	$	9,963	$	8,070	$	6,067
FHLB borrowings	459,550		335,700		113,350		500		10,000
Securities sold under agreements to repurchase	72,090		32,090		30,000		—		10,000
Holding company line of credit	30,000		30,000		—		—		—
Subordinated notes related to trust preferred securities	20,000		—		—		—		20,000
Time deposits (2)	1,678,028		1,336,103		265,249		70,458		6,218
Total	$	2,289,642	$	1,739,767	$	418,562	$	79,028	$	52,285

(1) Future minimum lease payments are reduced by $285 thousand related to sublease income to be received in the following periods: $209 thousand (less than one year); $67 thousand (1-3 years); and $9 thousand (3-5 years).

(2) At September 30, 2015, the total includes $66.8 million of time deposits included within “Other brokered funds.”

Liquidity

Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures.  Liquidity is monitored and closely managed by our Asset and Liability Committee (“ALCO”), a group of senior officers from the finance, enterprise risk management, treasury, and lending areas.  It is ALCO’s responsibility to ensure we have the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for, quickly identified, and management has plans in place to respond. ALCO has created policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources.  In addition, we have implemented modeling software that projects cash flows from the balance sheet under a broad range of potential scenarios, including severe changes in the interest rate environment.

At September 30, 2015, we had liquidity on hand of $813.6 million, compared to $656.8 million at December 31, 2014. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered securities available-for-sale.

Talmer Bank is a member of the FHLB, which provide short- and long-term funding to its members through advances collateralized by real estate-related assets and other select collateral, most typically in the form of U.S. government issued debt securities. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of September 30, 2015, we had $459.5 million of outstanding borrowings from the FHLB with remaining maturities ranging from the years 2015 to 2027. We also maintain relationships with correspondent banks which could provide funds on short notice, if needed. In addition, because Talmer Bank is “well capitalized,” it can accept wholesale funding up to approximately $2.0 billion based on current policy limits. Management believes that we had adequate resources to fund all of our commitments as of September 30, 2015.

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The following liquidity ratios compare certain assets and liabilities to total deposits or total assets.

	September 30, 2015		December 31, 2014
Investment securities available-for-sale to total deposits	17.18	%	16.29	%
Loans (net of unearned income) to total deposits	91.73		93.41
Interest-earning assets to total assets	92.02		90.91
Interest-bearing deposits to total deposits	79.51		80.49

Reconciliation of Non-GAAP Financial Measure

Our efficiency ratio is a measure of noninterest expense as a percentage of net interest income and noninterest income. Our core efficiency ratio begins with the efficiency ratio and then excludes certain items deemed by management to not be related to regular operations including bargain purchase gains, net gain on sale of branches, the fair value adjustment to our loan servicing rights, transaction and integration related costs, FDIC loss sharing income and $1.8 million of net expense recognized in the second quarter of 2015 related to our targeted review of property efficiency which included a review of certain lease contracts resulting in lease buyouts, final sales of unused properties and impairments recognized on owned properties under review for potential upcoming sales. Management believes this non-GAAP financial measure provides useful information to both management and investors that is supplementary to our financial condition and results of operations in accordance with GAAP; however, we acknowledge that this non-GAAP financial measures has a number of limitations. As such, your should not view our disclosure of our core efficiency ratio as a substitute for results determined in accordance with GAAP, and our core efficiency ratio is not necessarily comparable to non-GAAP financial measures that other companies use.

The following table presents a reconciliation of the core efficiency ratio to the efficiency ratio, the most directly comparable GAAP measure.

(Dollars in thousands, except per share data)	For the three months ended September 30,						For the nine months ended September 30,
	2015			2014			2015			2014
Core efficiency ratio:
Net interest income	$	55,647		$	52,217		$	156,288		$	152,800
Noninterest income	19,342			29,974			62,870			101,665
Total revenue	74,989			82,191			219,158			254,465
Less:
(Expense)/benefit due to change in the fair value of loan servicing rights	(3,831		)	(176		)	(4,769		)	(6,581		)
FDIC loss sharing income	(2,696		)	(2,420		)	(9,692		)	(5,967		)
Net gains on sales of branches	—			14,410			—			14,410
Bargain purchase gain	—			—			—			41,977
Total core revenue	$	81,516		$	70,377		$	233,619		$	210,626
Total noninterest expense	$	47,829		$	51,263		$	157,717		$	170,782
Less:
Transaction and integration related costs	113			1,428			3,879			13,280
Property efficiency review	—			—			1,820			—
Total core noninterest expense	$	47,716		$	49,835		$	152,018		$	157,502
Efficiency ratio	63.78		%	62.37		%	71.96		%	67.11		%
Core efficiency ratio	58.54			70.81			65.07			74.78

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 Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates.  Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of our interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates.  ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest-rate risk and its effect on net interest income and capital. Our Board of Directors approves policy limits with respect to interest rate risk.

Interest Rate Risk

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.

Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option risk.  Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes impact our assets and liabilities.  Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequence resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.

We regularly review our exposure to changes in interest rates.  Among the factors we consider are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods.  ALCO reviews, on at least a quarterly basis, our interest rate risk position.

The interest-rate risk position is measured and monitored at each bank subsidiary using net interest income simulation models and economic value of equity sensitivity analysis that capture both short-term and long-term interest-rate risk exposure. In addition, periodic Earnings at Risk analysis incorporate the expected change in the value of loan servicing rights and the net interest income simulation results.

Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.

The estimated impact on our net interest income as of September 30, 2015 and December 31, 2014, assuming immediate parallel moves in interest rates is presented in the table below. Simulation results for September 30, 2015 reflect the addition of First of Huron Corp.’s acquired assets and assumed liabilities.

	September 30, 2015				December 31, 2014
	Following 12  months		Following 24 months		Following 12 months		Following 24 months
+400 basis points	(0.4	)%	(0.3	)%	1.6	%	3.2	%
+300 basis points	(0.5	)	(0.1	)	1.0		2.3
+200 basis points	(0.4	)	0.3		0.6		1.7
+100 basis points	(0.2	)	0.4		0.3		0.9
-100 basis points	(3.6	)	(4.5	)	(4.2	)	(5.2	)
-200 basis points	(7.9	)	(10.7	)	(9.0	)	(11.2	)
-300 basis points	(10.2	)	(13.3	)	(11.3	)	(13.6	)
-400 basis points	(10.7	)	(13.9	)	(11.8	)	(14.2	)

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Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of our loan portfolio, investment portfolio, loan servicing rights, any hedge or derivative instruments, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The model includes the effects of off-balance sheet instruments such as interest rate swap derivatives. Due to the current low interest rate environment, we assumed that market interest rates would not fall below 0% for the scenarios that used the down 100, 200, 300 and 400 basis point parallel shifts in market interest rates. The analysis provides a framework as to what our overall sensitivity position is as of our most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of our equity.

Management strategies may impact future reporting periods, as our actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience, and the characteristics assumed, as well as changes in market conditions. Market based prepayment speeds are factored into the analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.

We use economic value of equity sensitivity analysis to understand the impact of interest rate changes on long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios. Deposit premiums are based on external industry studies and utilizing historical experience.

The table below presents the change in our economic value of equity as of September 30, 2015 and December 31, 2014 assuming immediate parallel shifts in interest rates.

	September 30, 2015		December 31, 2014
+400 basis points	(21.1	)%	(22.2	)%
+300 basis points	(15.5	)	(15.8	)
+200 basis points	(9.8	)	(8.9	)
+100 basis points	(4.6	)	(3.9	)
-100 basis points	(2.0	)	—
-200 basis points	(5.8	)	(0.2	)
-300 basis points	(5.8	)	0.4
-400 basis points	(5.2	)	0.8

Operational Risk

Operational risk is the risk of loss due to human behavior, inadequate or failed internal systems and controls, and external influences such as market conditions, fraudulent activities, disasters, and security risks. We continuously strive to strengthen our system of internal controls, enterprise risk management, operating processes and employee awareness to assess the impact on earnings and capital and to improve the oversight of our operational risk.

Compliance Risk

Compliance risk represents the risk of regulatory sanctions, reputational impact or financial loss resulting from our failure to comply with rules and regulations issued by the various banking agencies and standards of good banking practice. Activities which may expose us to compliance risk include, but are not limited to, those dealing with the prevention of money laundering, privacy and data protection, community reinvestment initiatives, fair lending challenges resulting from the expansion of our banking center network and employment and tax matters.

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Strategic and/or Reputation Risk

Strategic and/or reputation risk represents the risk of loss due to impairment of reputation, failure to fully develop and execute business plans, failure to assess current and new opportunities in business, markets and products, and any other event not identified in the defined risk types mentioned previously. Mitigation of the various risk elements that represent strategic and/or reputation risk is achieved through initiatives to help us better understand and report on various risks, including those related to the development of new products and business initiatives.

Item 4.  Controls and Procedures.

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of September 30, 2015, the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There was no change in our internal control over financial reporting that occurred during the period to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The design of any system of controls and procedures is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

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PART II

Item 1.  Legal Proceedings.

From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, prospects, financial condition, liquidity, results of operation, cash flows or capital levels.

Item 1A.  Risk Factors.

There have been no material changes to the risk factors disclosed in Item 1A. of Part I in our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3.  Defaults Upon Senior Securities.

None.

Item 4.  Mine Safety Disclosures.

Not applicable.

Item 5.  Other Information.

None.

Item 6.  Exhibits.

Exhibit No.	Description of Exhibit
31.1	Rule 13a-14(a) Certification of the Chief Executive Officer
31.2	Rule 13a-14(a) Certification of the Chief Financial Officer
32.1	Section 1350 Certifications
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015, formatted in eXtensible Business Reporting Language (XBRL); (i) Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014, (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014, (iv) Consolidated Statement of Changes in Shareholders’ Equity for the nine months ended September 30, 2015 and 2014, (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014, and (vi) Notes to Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	TALMER BANCORP, INC.
November 12, 2015	By:	/s/ David T. Provost
		David T. Provost
		Chief Executive Officer
		(Principal Executive Officer)
November 12, 2015	By:	/s/ Dennis Klaeser
		Dennis Klaeser
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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